An IRA (Individual Retirement Account) is a good personal investment to make, as both traditional and Roth IRAs typically require a smaller opening fee than most retirement investments; fees will differ from bank to bank.
A Roth IRA differs from a traditional IRA in a few significant ways:
Contributions made to a Roth IRA are not tax-deductible.
There is no mandatory distribution age; you can start, and withdraw from, a Roth IRA at any time. There is no penalty for withdrawing your principle (your initial contribution), but you cannot withdraw earnings on the account without a fee.
You are not required to make withdrawals from your Roth IRA at a certain age (with a traditional IRA you need to begin making withdrawals at retirement age), and you may contribute money into it for as long as you want, provided you meet the income guidelines.
Roth IRAs don’t have to be used strictly for retirement. In some special circumstances, such as buying a first home or paying for school, you may be allowed to withdraw from your account without paying a penalty.
The main quality that sets a Roth IRA apart from other investments is that it is tax-free. When you reach retirement age you may withdraw the earnings and the principle free of income tax. Also, your beneficiaries can withdraw from your Roth IRA if it has been open for more than 5 years (this provision is free from income tax only; estate taxes may still apply).
The 2009 guidelines for Roth IRAs are as follows:
The maximum annual contribution is $5000 for accountholders age 49 and under, and $6000 for those 50 and older. This amount does not need to be deposited all at once; you can pay in portions so long as the total does not exceed the maximum for the year. This amount does not roll over (for example you cannot contribute $3000 one year and $8000 the next). Contributions for 2009 can begin as early as January 2, provided you designate it for 2009; contributions for 2008 are allowed until April 15.
In order to make this maximum contribution, your gross annual income cannot exceed $105k (for singles), or $166k (for married couples filing jointly). You can make a smaller contribution if your gross income is still under $120k (single) or $176k (married filing jointly). If your income surpasses this amount you are no longer eligible for a Roth IRA account.
While not for everyone, a Roth IRA makes for a solid small investment.
