ROTH IRA.

Roth Individual Retirement Arrangement (Roth IRA) is basically a conditional tax-free retirement plan. Existing tax laws state that a specific amount of retirement savings is liable to tax reduction. The principal difference between Roth IRA and the other tax-advantaged retirement plans is the fact that in Roth IRA, the tax break is given when money is withdrawn from the plan upon retirement as compared to other tax-advantaged retirement plans where the tax break is given when money is deposited into the plan.

Roth IRA can be either an individual retirement account or an individual retirement annuity. The individual retirement account contains investments in form of securities such as bonds and common stock; but still other investments such as certificates of deposit, derivatives real estate and notes are still allowed. In an individual retirement annuity, the endowment contract or the annuity contract is purchased from an insurance company (usually a life insurance company).

The IRS (Internal Revenue Service) does confer specific filing status and eligibility requirements on all IRAs, including Roth IRA. However, Roth IRA does offer certain advantages such as a flexible tax structure and fewer investment restrictions and this has endeared Roth IRA to the general public.

The contribution limits for IRAs is usually lesser that the taxable compensation (the taxable compensation is not to be confused with the adjusted gross income). Roth IRA contribution limits is limited to an amount not exceeding what one earns per annum, for instance, the Roth IRA contribution limits 2014 ensures that one cannot contribute an amount exceeding his or her projected earning for the year 2014. Moreover, the other qualifying condition of one being 59.5 years old or over must also be met (however, there exists a rollover conversion clause for those who have not attained the aforementioned age). Traditional IRA contribution limits are also determined by law. However, for Roth IRA, there is an exception for the clause of spousal IRA whereby an income earning spouse can make a contribution on behalf of a spouse who does not earn an income and thereafter both of them can file (or document) a joint tax return.

There exists a fundamental difference between Roth and traditional IRA in that for Roth IRAs, the untaxed withdrawal is normally limited to the principal withdrawal though the current tax liability does not extend to transactions made inside an account; while for traditional IRAs, a certain amount of tax is deducted upon withdrawal and in some extent to the transactions made inside an account.

In Roth IRAs, if one of the spouses dies, the remaining spouse automatically becomes the sole beneficiary of the plan of his or her spouse while still being legally allowed to maintain his or her own separate Roth IRA account, and the law also allows the remaining spouse to combine both Roth IRA plans into one plan without incurring any penalty. Moreover, assets held in Roth IRA can be passed on to heirs. Unlike traditional IRAs, Roth IRA doesn’t require age-based distribution. Roth IRA contributions do not in any way affect calculations of taxable benefits.