A Roth IRA is a special type of IRA that allows you to make contributions with after-tax dollars instead of taking a tax deduction for your contribution like a traditional IRA. In exchange, you can withdraw the money tax-free at retirement.

Income Limits

The biggest barrier to contributing to a Roth IRA is the modified adjusted gross income limitations. These are adjusted annually for inflation and depend on your filing status.

Minimum Income

You must have taxable income to contribute to a Roth IRA. The amount you can contribute is limited to the smaller of the annual limit or your taxable income. For example, if you have $3,000 in taxable income and the annual contribution for that year is $5,000, you would be allowed to contribute a maximum of $3,000.

Reduced Contributions

A modified adjusted gross income range for each filing status allows you to make a partial contribution. For example, for 2009, if you are single and your modified adjusted gross income is between $105,000 and $120,000, you could open a Roth IRA, but the amount you can contribute is reduced.

Considerations

If you contribute to a traditional IRA, your contribution limit for the Roth IRA will be smaller because the limit is cumulative. For example, if the annual limit is $5,000 and you contribute $5,000 to a traditional IRA, you will be not be able to contribute to a Roth IRA.

Bottom Line

A Roth IRA is best for people who expect to be in a higher tax bracket at retirement than they are when they make the contribution. This is because the deduction that you could have taken if you had chosen to contribute to a traditional IRA instead of a Roth IRA would be worth less than the ability to withdraw the money tax-free.

Misconceptions

There are no age limits nor income restrictions based on your access to a work-sponsored retirement plan like a 401k like there are for a traditional IRA.

Source:

Basic Rules for Regular Contributions

IRS Roth IRA Rules