One of the most popular retirement account options available is the Individual Retirement Account (IRA). And, one of the more popular versions of the IRA is the Roth version. If you want to take advantage, you need to understand the Roth IRA rules.

What is a Roth IRA?

An IRA is popular because it provides a certain amount of flexibility when it comes to investing your retirement dollars. Anyone with earned income can open an IRA and contribute — even if you have a plan offered by your employer.

With a Traditional IRA, you can receive tax deduction for your contribution. Later, though, you have to pay taxes when you withdraw the money from your account. The Roth, however, is different. Instead of contributing before-tax dollars and reducing your tax liability now, you make your contributions with after-tax dollars.

The advantage to the Roth contribution is that you receive tax-free growth. So, even though you pay taxes on the money you contribute now, all of your earnings grow tax-free. When you withdraw the money during retirement, you don’t have to pay taxes on it. If you think that you will owe more taxes on your money later on in life, either because you are in a higher tax bracket or because taxes go up, it can make sense to contribute to a Roth IRA. You pay taxes now, at the lower rate, and avoid paying them later.

Who Can Contribute to a Roth IRA?

Not everyone can contribute to a Roth IRA. While anyone with an earned income can contribute to a Traditional IRA (even though the ability to take a tax deduction phases out), the Roth IRA rules are different. There are limits to how much you can contribute to a Roth IRA.

First of all, there are contribution limits. The IRS reviews these each year and, when necessary, adjusts for inflation. For 2013, the maximum contribution to a Roth IRA is $5,500, up from the $5,000 limit in 2012.

Next, you should realize that you might not be able to contribute to a Roth IRA, depending on how much money you make, according to your Modified Adjusted Gross Income. Once you make $178,000 (married filing jointly) the amount you contribute to a Roth IRA is reduced. Once you reach an income of $188,000 in this situation, you can no longer contribute to a Roth IRA. For those who are filing as single start to see a phase out at $112,000 a year, and cannot contribute to a Roth at all if you make $127,000.

Roth IRA Rules for Withdrawal

Another advantage to the Roth IRA is that you don’t have to take Required Minimum Distributions. With other retirement accounts, you are forced to start taking minimum distribution amounts at age 70 1/2. A Roth IRA, though, doesn’t come with this requirement

You can withdraw the money you contribute to a Roth IRA at any time, and for any reason, without penalty. However, this isn’t true of the earnings from your money. In most cases, in order to access earnings without a 10% penalty, you need to be 59 1/2, and have the account for at least five years.

Overall, a Roth IRA provides a great deal of flexibility, and it has unique advantages. Consider whether or not this type of retirement account is right for you.

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