Eligibility

• If you or your spouse have earned income, you may be eligible to contribute to a Roth IRA. The Internal Revenue Service (IRS) limits the amount of income you can have and still contribute to a Roth, and this amount changes every year. For 2010, contributions are limited for amounts between $105,000 and $120,000 for those filing as single, head of household or married filing separately and not having lived with a spouse during the course of the year. For those filing jointly, contributions phase-out between $167,000 and $177,000 of adjusted gross income, while for married people filing separately and having lived with spouse contributions are limited at incomes of just $0 to $10,000. Roth contributions are prohibited for those with adjusted gross incomes above the top-end of the phase-out ranges.
  
  

Contributions

• For 2010, contributions are limited to $5,000, or to the extent of your taxable compensation. If you are 50 years of age or older, you may contribute an additional $1,000. If one spouse works, both may make Roth contributions to their own accounts, up to the lesser of their combined taxable compensation or $5,000. Contributions can continue up until the death of the owner, unlike other qualified plans which restrict contributions at age 70 1/2.
  
  

Tax-Free Growth

• The growth of your funds in a Roth IRA is tax-free. Regardless of how much dividend or income interest you generate or capital gains you achieve through buying and selling securities, you do not need to report this income on your annual tax return.
  
  

Distributions

• Unlike other qualified retirement plans, Roth IRA distributions are generally tax-free. Additionally, there is no required minimum distribution at any age, unlike other plans which require withdrawals once the account owner reaches age 70 1/2.
  
  

Conversions

• Traditional IRA accounts may be converted into Roth accounts, but you must pay ordinary income tax on the entire amount of the conversion. Conversions were formerly restricted if you had an adjusted gross income of more than $100,000, but as of 2010, this restriction has been lifted.
  
  

Five-Year Holding Period

• If you withdraw funds from a Roth IRA in the first five years after funding, the earnings on the contributions you withdraw will be taxable at ordinary income rates.
  
  

Other Taxes and Penalties

• As with other qualified plans, if you withdraw funds from your Roth IRA before the age of 59 1/2, you may be subject to a 10 percent IRS penalty for early withdrawal. This penalty can be waived for certain qualifying reasons, including death, disability, the first-time purchase of a home (up to $10,000) or excess unreimbursed medical expenses.