In order to understand Roth IRA Accounts, you first need to understand the concept of a Roth IRA. IRA is an acronym for individual retirement arrangements, wherein an earning person can contribute his money to a Roth IRA account. The advantage of this arrangement is that, though the contributions themselves are subject to tax deductions, withdrawals are not taxed. The advantage of this is that your income is allowed to grow tax-free. This means while a contribution is made with after-tax money, there is no tax involved with the withdrawal, subject to certain conditions. So in a way, the Roth IRA is a good way to convert income earned from dividends, interest, and capital gains etc. into tax-free money.
An individual cannot contribute more than $4,000 to the Roth IRA Account, though he may have a large number of such accounts. But the contribution limit to these accounts should not exceed $4,000.
A Roth IRA Account can be built from either contributions or from conversions. An account made from contributions involves the annual payments made by individuals in cash. Conversion accounts, on the other hand, involve the contributions made from converting a traditional IRA into a Roth IRA.
Contributions to these accounts can be made from January 1 of the current year to the next filing deadline date, which is usually April 15 of the following year. Moreover, you can withdraw the money from a Roth IRA Account after five years, and also if you have turned fifty nine and a half years of age or you have suffered some sort of disability. All such withdrawals are tax-free and penalty free.
In fact, there is one major difference between the ordinary IRA Accounts and the Roth IRA Accounts. The rules of withdrawal vary for people who have reached seventy and a half years of age. There is absolutely no requirement that a person above this age would ever have to make a withdrawal from Roth IRA Accounts. But this is not so for traditional IRA Accounts, where some minimum amount of withdrawals have to be made.
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