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With the imminent demise of social security and the virtual elimination of corporate pensions, American workers must now find new alternatives to save for retirement. An excellent vehicle for providing wealth beyond the working years is a Roth IRA. A look at 2008 Roth IRA rules, limits and contributions will help individuals make an informed, intelligent decision.

What is a Roth IRA?

As a means of enticing Americans to save for retirement, individual retirement accounts (IRAs) were established in 1974. The Employment Retirement Income Security Act (ERISA) provided a tax free way of saving for retirement. In 1998, Congress created the Roth IRA as an additional way to provide tax relief to wage earners. Although money contributed to a Roth IRA is non-deductible, there are many tax advantages. Money in a Roth IRA grows tax-deferred and is tax free upon withdrawals taken after age 59.5.

Who is eligible?

To be eligible, your 2008 income cannot exceed $101,000 if single or $159,000 if married filing jointly. Any income contributed to a Roth IRA has to be earned, which means contributions cannot be from an inheritance, interest earned off other investments, rentals, etc.

What are the contribution limits?

In 2008, any eligible individual can contribute up to $5,000 in his or her Roth IRA. For individuals 50 or older, a $1,000 catch up contribution is also allowed. There is no carry over from year to year. If your 2007 contribution falls $1,000 short of the limit, it cannot be made up the following year; however, any contribution made before April 15, can be counted toward the prior year's contribution. Any money contributed to a traditional IRA counts toward the contribution limit on a Roth IRA.

What investments are permitted in a Roth IRA?

A Roth IRA is not an investment; it is a tax shelter that allows you to accrue money tax deferred; therefore, it is not the Roth IRA that earns money, it's the investments inside the Roth IRA that earn money. Therefore, the rate your Roth IRA earns is dependent on the investments contained therein. A variety of investments including stocks, bonds, mutual funds, cds, money market accounts, stock options, REITs, and tax lien certificates are permitted.

When can I make withdrawals from my Roth IRA?

Those who withdraw money from a Roth IRA before the age of 59.5 will be required to pay taxes on interest earned and a 10% withdrawal penalty. The following exceptions do exclude the 10% penalty: a confirmed disability to the IRA owner; death of the IRA owner; a first time home purchase of up to $10,000; qualified higher education expenses for IRA owner or a direct family member; and reimbursement of medical expenses that exceed 7.5% of IRA owner's adjusted gross income.

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