ANSWERS: 1
  • A Roth option is a type of retirement account that offers different tax benefits than traditional accounts. Account types with Roth options include IRAs, 401(k)s and 403(b)s.

    Features

    Contributions made to a Roth option account are not tax-deductible as they are to traditional retirement savings accounts. However, withdrawals are tax-free at retirement.

    Eligibility

    To be eligible to contribute to a Roth IRA, your income must be below annual limits set by the IRS. The IRS does not put income limits on Roth 401(k)s or Roth 403(b)s, but you can contribute to these account types only if they are offered by your employer.

    Contribution Limits

    The contribution limits for Roth accounts vary by account type and change each year. In 2010, the contribution limit for Roth IRAs was $5,000 if you were under age 50 and $6,000 if you were 50 or older. You could contribute up to $16,500 to Roth 401(k)s and Roth 403(b)s; if you are 50 or over, this limit increased to $22,000.

    Withdrawals

    You can withdraw the contributions you make to your Roth accounts without penalty at any time. However, the earnings must remain in the account until you've reached age 59 1/2 and the account has been open at least five years. If you withdraw earnings early, you may have to include them as taxable income and pay a 10 percent early-withdrawal penalty.

    Considerations

    Roth option accounts are best for people who are in a lower tax bracket for the current tax year than they expect to be in at retirement. For example, if you are currently in the 15 percent tax bracket, but expect to be in the 25 percent tax bracket at retirement, you are better off paying taxes on contributions at the 15 percent rate than having to pay taxes on the withdrawals at the 25 percent rate.

    Source:

    IRS: Roth IRA Rules

    IRS: Retirement Plans FAQs regarding Designated Roth Accounts

    The Money Alert: IRA and 401k Contribution Limits

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