Roth IRA FAQs

What is a Roth IRA? An independent retirement account is an investment vehicle. You contribute money to these accounts and then within that account, with those earnings, you invest in stocks, bonds, CDs--or whatever other types of investments you've chosen. You can set these accounts up any pretty much any financial institution.

How are they different from traditional accounts? While with a traditional style of account your contributions are taken from your income before taxes are taken out (which deducts those contributions from your yearly income) with a Roth account your contributions are taken out after taxes. With a traditional account you would have to pay taxes on this money when you withdraw in retirement, which you won't have to do with a Roth account.

What is the contribution limit? This changes every year and is set by the government. For 2010 the contribution limit is set at $5,000, with a $1,000 catch up contribution.

What is a catch-up contribution? A catch up contribution is available for those between the ages of fifty and fifty nine and a half years old. It sets let them contribute additional funds to their accounts to prepare for retirement.

Can I contribute to both a traditional and Roth IRA in the same year? Yes, but it's important to note that the contribution limit for the year applies to any contributions made between accounts. So, you can contribute $5,000 in 2010 to your IRAs, but it's $5,000 between any accounts you have, total.

Can I have both a 401k and an IRA? Yes you can, and often what some people decide to do is set up the opposite of the account type they have for their 401k. So, if you have a traditional 401k with your contributions coming from your before tax income, then you might want to set up a Roth IRA, which after tax contributions. This way you diversify your tax interests in retirement.