by The Armchair Geek

Created on: September 22, 2007   Last Updated: February 14, 2008

The Roth Individual Retirement Account (Roth IRA) has been described as the greatest retirement plan ever created. It was created for regular working folks, with huge tax incentives to encourage them to save for their retirement. Since the advent of Roth IRAs they have become increasingly popular, particularly among middle-class families.

How Does a Roth IRA Compare to the Traditional IRA?

The traditional IRA is a tax-deferred investment account: your contributions are made with pretax dollars, and withdrawals are subject to income taxes. It effectively lowers your taxable income, enabling you to pay less in taxes. However, once you make withdrawals from the account after retirement, you will pay taxes on your contributions and earnings.

Your contributions to a Roth IRA are with after-tax dollars. Because you have already paid income taxes on this money, your withdrawals are forever tax-free within certain limits. Unlike the traditional IRA, your Roth IRA contributions are not tax-deductible.

The most significant difference between the two is the tax savings.

Consider Jane and Joe, two individuals of the same age. They each make annual contributions of $4,000 to their IRAs for the next 40 years. Assuming the same annual return of 8%, for example, they will both have over a million dollars saved up for retirement at age 65. However, say Jane invested in a Roth IRA - she will not owe Uncle Sam a dime in taxes. If Joe, on the other hand, had his money invested in a traditional IRA, and if his withdrawals are taxed at the rate of 15%, he will only have roughly $850,000 available for his retirement.

The Rules of the Roth
Do you qualify for a Roth IRA? Here are the requirements:
*To contribute to a Roth you must have an income that is earned from a job. You cannot invest any income derived, for example, from an inheritance. You cannot contribute more to your Roth than you earn in a given year.
*With a Roth IRA, you may save up to an annual maximum of $4,000. In 2008, that figure rises to $5,000. If you are 50 or older, you are allowed an additional $1000 "catch up" contribution.
*It also has an income cap that limits participation in a Roth to individuals whose household income does not exceed $95,000 if single, or $150,000 if married and filing a joint tax return.

The Benefits of a Roth IRA
*There is no age limit for contributing. You may contribute to your IRA for as long as you have an earned income, even beyond age 70 .
*There is no mandatory distribution age for making

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