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All funds invested in a Roth IRA grow tax-free while within the account. This is in contrast to standard investment accounts where capital gains taxes must be paid when investments are sold at a profit, and taxes on interest must be paid every year. In retirement, money can be withdrawn from a Roth IRA tax-free, including all gains and income.
Contributions to Roth IRAs are limited to taxpayers with a modified adjusted gross income less than $177,000 for those who are married filing jointly, and $120,000 for those who file as single, head of household, or married filing separately, as of 2010. Taxpayers with higher incomes than these amounts cannot contribute money to a Roth IRA.
Annual Contribution Limits for Married Filing Jointly
The Roth IRA contribution limit for most taxpayers who are married filing jointly is $5,000 each year, as of 2010. However, taxpayers over age 50 can also make an additional $1,000 per
year contribution known as a catch-up contribution, for a total of $6,000 per year. Married couples filing jointly who have a modified adjusted gross income of more than $167,000 (but less than $177,000) face a contribution limit. To compute the allowable reduced Roth IRA contribution, use IRS Publication 590 Worksheet 2.2.
Annual Contribution Limit for Single Taxpayers
For taxpayers filing as single, the full $5,000 contribution to a Roth IRA can be made if your modified AGI is below $105,000, as of 2010. Taxpayers over 50 years old may make an additional $1,000 catch-up contribution. Single taxpayers with modified AGIs above $105,000 but less than $120,000 can only make a reduced contribution. To figure the reduced contribution limit, use Worksheet 2.2 in IRS Publication 590.
Additional Roth IRA Contribution Limits
Contributions may only be made with taxable money. Regardless of potentially higher maximum limits, contributions to a Roth IRA may not exceed your taxable compensation for the year the contribution is made.