The Roth IRA is an individual retirement account that was created in 1998. It allows individuals to contribute to their financial future without having an age requirement. There are some rules for the Roth IRA contributions for 2011 as there have been since it was brought about but on average, these retirement accounts can be very beneficial.
Requirements and Limitations
The only requirement that needs to be met to contribute to a Roth IRA is the need to have an income. There are limitations regarding how much a person can earn and contribute. For the various divisions of individuals filing for the IRA, there is a phase-out and a cutoff in terms of earnings. For example, as of 2011, single filers can earn up to $107,000 before the contributions are phased out and any single filer making more than $122,000 cannot make contributions.
Individuals that do not make over the permissible limit are allowed to make the maximum contributions. For any group of individuals, if they are within the permitted income range, the maximum amount of money allowed to be contributed in $5,000 a year until the year that they turn 50. After this age, they can contribute $6,000 a year.
Benefits of Contributing Maximum Amounts
While it is not always possible to contribute the $5,000 or $6,000 maximum amount per year into the Roth IRA, when it is, individuals are highly recommended to do so. There are a few quite important benefits that these individuals will receive in the future.
Higher Total Earnings: Individuals who contribute $5000 a year starting when they are 40 years old will have collected $50,000 by the time they reach 50 years old. At this point, they can contribute $6,000 per year. Multiply this figure by 20 years, and an additional $120,000 has been saved by the age of 70. Within 30 years, a total of $170,000 has been put away for retirement through making the maximum IRA contributions.
This type of savings has a huge effect on the financial stability of a person or family during this time. It is more than many people have and is enough to survive on for quite some time given that they manage their money well.
Higher Interest Received: The money that is contributed into this fund is not deductible on the tax form but the interest received on it is not taxed. The figures on one year of contributions when it is $1,000 may not seem like very much but when the maximum IRA contributions are made, this grows exponentially.
As an example, if the individual can receives 8% compounded interest and they have $170,000 saved from the maximum IRA contributions, they will receive over $25,000 a year for ten years. The amount per year will change depending on the amount of years they expect to be using this money and the interest rate. The exact amount for a particular situation can be checked using a Roth IRA financial calculator.
It doesn’t matter how much interest is received on the amount that has been placed into the account – these are tax-free earnings. If an individual makes $20,000 or even $80,000 in interest, it belongs to them for their retirement without having to worry about paying extra taxes on that income.
No Obligation for Withdrawal
As a side note, individuals interested in making the maximum IRA contributions permitted for 2011 and onward should know that they are not obliged to start withdrawing this money when they are 70 years old. If they are in the situation to do so, they can continue to place funds into this account without being penalized.
Fund Management
Funds might be difficult to find to make such contributions but the financial future for those without the retirement planning behind them can be even more difficult. Making the most of the maximum IRA contributions limitation can be very beneficial for the future, not just in terms of the amount saved, but also in terms of the non-taxable interest that is collected.