What is a Roth IRA?

Like other retirement savings plans, the Roth IRA allows you to invest money that you’ll use when you retire. Your money accumulates tax-free and remains that way until you use it. The Roth IRA was established as a part of the Taxpayer Relief Act of 1997 and has been available to investors since 1998.

Why choose the Roth IRA?

There are several questions that can help you decide if a Roth IRA is right for you:

• What are my plans for the future?
• When will I need to withdraw money from my IRA?
• What will my finances be like at that time and how will it affect my taxes?
• What other income will I be receiving at the time I’d like to withdraw money?

Tax advantages

You get tax benefits with a Roth IRA when you make withdrawals, and under certain conditions, the withdrawals you make aren’t taxed at all. (See conditions described under Distributions, below.) So you’re basically converting the money you make into tax-free income.

However, because all contributions to a Roth IRA are made with after-tax dollars, you don’t receive any tax benefit for putting money in. So, unlike a traditional IRA, you can’t deduct contributions from gross income on your federal tax return. It’s up to you to decide if the potential for tax-free income in the future or a current tax deduction is more important.

Distributions

When you withdraw money from your Roth IRA, it’s called getting a distribution. What you put in, referred to as the principle, can be withdrawn income-tax free at any time. If you’re older than 59½ and you started your Roth IRA at least five years ago, then any money gained on top of the principal (your earnings) can be withdrawn tax-free. Otherwise, withdrawals can be taxable and possibly subject to a 10 percent early-withdrawal penalty.

Another advantage to the Roth IRA is that the government’s rules for minimum distribution do not apply. So if at retirement you’re living off other resources and don't need the income from your Roth IRA, you aren’t forced to withdraw money at age 70½ as you would with a traditional IRA. Earnings can simply remain in your account and continue to grow income-tax free. However, if you die, anyone you’ve chosen as your beneficiary will be required to take distributions, and the money left in your account could be subject to estate taxes.

In some special cases, like if you want to use the money to buy your first house, withdrawals can be made prior to age 59½ without penalty. But in other cases, like if you’re buying your second house, withdrawals can be taxable. In other words, you can always access your money, but it’s best to keep it in your account.  If at all possible, you need to consult with your financial planner before you make any decisions about withdrawing money from your account

Eligibility

If you take part in a retirement plan through your employer, you can still make regular annual contributions to a Roth IRA. A tax law change in 2001, increased the annual contribution limits through 2008, based on the schedule below: 

Year	Contribution Limit
2002–2004	$3,000
2005–2007	$4,000
2008	$5,000

Contributions can’t be more than your income. If you're single and want to make the maximum contribution, your yearly income can’t exceed $95,000. If you're married and filing a joint return, your yearly income limit is $150,000.

When your adjusted gross income exceeds $95,000 (single) or $150,000 (married filing jointly), the amount you can contribute is reduced over time and eventually eliminated.

There are no limits to the number of Roth IRA accounts you can have, but the contribution limit applies to all accounts put together. For example, if you have 16 Roth IRA accounts in 2006, you can only contribute $4,000 total to those accounts. However, that total can be divided up any way you’d like.

Restrictions

Age doesn’t affect your contribution limit, because, unlike traditional IRAs, you can keep making contributions after age 70½. You can even set up a brand new Roth IRA at age 85 and begin investing, as long as you still meet the income rules described above.

There is also no minimum age limit. A minor can set up a Roth IRA and make contributions to it under the same income requirements as an adult.

A retirement plan through your employer won’t affect your ability to contribute to a Roth IRA either. If you meet the income requirements described above, you can contribute to a Roth IRA even if you're covered by an employer plan.

Getting started

After determining that the Roth IRA is right for you, take these steps to get started:

• Confirm your eligibility
• Look at other investments and choose the amount you’d like to contribute to your Roth IRA
• Research and select a provider
• Establish your Roth IRA

Look at your timeframe for investing, your other investment activity and your investment style to decide the best type of investment for your Roth IRA—and your future.  And remember, federal income tax laws are complex and ever-changing. The information presented here is based on current interpretations of the law and is not guaranteed.  Also, neither Nationwide nor its agents or representatives give legal or tax advice. Please consult your attorney or tax adviser for answers to your specific tax questions.