What is a Roth IRA? A traditional IRA is something we all know about. You put in money when you are working, presumably at a high tax rate, and you get that money deducted from your income, saving on your Federal and State taxes. When you retire, presumably at a lower rate, you pay ordinary income taxes on the amount you take out. If you move to Florida, this may mean no State taxes at all!
So the regular IRA is a good deal, as is the 401(k), Simple IRA, Thrift Savings Plan, SEP and CSEP plans.
A Roth IRA reverses the process. You pay taxes when you contribute the money to the plan, and then can take the money out, tax-free, later on.
The total contributions allowed per year to all IRAs is the lesser of one's taxable compensation (which is not the same as adjusted gross income) and the limit amounts as seen below (this total may be split up between any number of traditional and Roth IRAs. In the case of a married couple, each spouse may contribute the amount listed):
For example, if one is single, aged 49 or under, and earns $10,000, one can contribute a maximum of $5,000 in 2008.
Age 49 and Below Age 50 and Above 1998–2001 $2,000 $2,000 2002–2004 $3,000 $3,500 2005 $4,000 $4,500 2006–2007 $4,000 $5,000 2008–2012* $5,000 $6,000 2013–2014 $5,500 $6,500