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A Roth IRA is an individual retirement
account wherein a person can save his or her tax-deducted income for
retirement and get tax-free earnings in returns. It is different
from the traditional IRA account, in that the earnings are
tax-exempt, but the earnings may or may not be tax-free.
There are two ways to contribute funds to the Roth IRA account. One
is by simply depositing compensation income, which can be the income
obtained in the form of wages, earnings from a self-employed work,
or even alimony. The other way is to convert funds from a
traditional IRA to the Roth IRA. This can be done by taking funds
from the traditional IRA account and depositing them into the Roth
IRA account within 60 days of receiving the funds. Therefore, a Roth
IRA Conversion account is a retirement account created when a person
converts his or her regular IRA account into a Roth IRA account. To
convert a regular IRA account into a Roth IRA account, you have to
meet certain eligibility criteria. The Conversion is not allowed if
the modified adjusted annual gross income exceeds $100,000. This
applies for single tax-return filers, and also married couples
filing their tax returns jointly.
It is important to
note that the entire amount used to convert a regular IRA account
into a Roth account, is subject to income tax. This is because
contributions to a Roth IRA are tax-deductible.
So far
as withdrawals or distributions are concerned, the rules for a Roth
Conversion account have a penalty for early withdrawal. This means
that there is a penalty if the distribution is made within the first
five-year period beginning from the year when the first
contributions were made from a regular IRA.
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