Get new articles by email:

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning.

Join over 20,000 email subscribers:

Articles are published every Monday. You can unsubscribe at any time.

Roth IRA Rules (in Plain English)

A Roth IRA is not an investment. Rather, it’s a type of investment account, in which you can invest in any number of different things (stocks, bonds, mutual funds, etc.).

What’s unique about a Roth IRA is that you are not taxed on the interest, dividends, or capital gains in the account. Provided that you meet a few requirements (discussed below), everything that comes out of a Roth IRA is tax-free.

Note: This is in contrast to a traditional IRA. With a traditional IRA (if you meet certain requirements) you receive a deduction when you put money in, but everything is taxable as income when it comes out.

Opening a Roth IRA

There are numerous brokerage firms with which you could open a Roth IRA. For the most part, where you open an IRA won’t have much impact on what investments you have access to. As a result, I’d suggest focusing on low costs and good customer service.

My suggestion for most circumstances is Vanguard. You can see my Vanguard IRA Review here.

    Roth IRA Contribution and Income Limits

    For 2010, the maximum contribution to a Roth IRA is $5,000 ($6,000 if you’re age 50 or over). However, your eligibility to make a maximum contribution depends upon your income:

    • If you’re single, you can make a full contribution to a Roth IRA if your 2010 Modified Adjusted Gross Income is less than $106,000.
    • If you’re married filing jointly, you can make a full contribution to a Roth IRA if your 2010 Modified Adjusted Gross Income is less than $167,000.

    Roth IRA Conversions

    A Roth IRA conversion occurs when you take money out of a traditional IRA (or other tax-deferred IRA, such as a SEP) and move it to a Roth IRA. Depending upon a few factors, such as how you expect your tax bracket in retirement to compare to your current tax bracket, this move may save you a good deal of money.

    Related resources:

    Taking Money Out of a Roth IRA

    With the exception of amounts converted from a traditional IRA, contributions to a Roth can be withdrawn free from tax and penalty at any time. To avoid penalty and tax on withdrawals of earnings, you’ll have to jump through a few hoops.

    Related resources:

    New to Investing? See My Related Book:


    Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

    Topics Covered in the Book:
    • Asset Allocation: Why it's so important, and how to determine your own,
    • How to to pick winning mutual funds,
    • Roth IRA vs. traditional IRA vs. 401(k),
    • Click here to see the full list.

    A Testimonial:

    "A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing
    Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. The information on this site is for informational and entertainment purposes only and does not constitute financial advice.

    Copyright 2024 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

    My Social Security calculator: Open Social Security