Both traditional IRAs and Roth IRAs have the same annual contribution limit: a maximum of $4,000 for the years 2005 through 2007. The amount will increase to $5,000 per person in 2008. But that's where the similarities end. Unlike traditional IRAs, contributions to a Roth aren't tax deductible. Money invested grows tax-deferred, but, unlike traditional IRAs, all withdrawals after age 59 1/2 are tax free, provided the Roth has been open for at least five years. If you're choosing between saving for retirement or for the down payment on your first house, all earnings and interest up to $10,000 on your Roth can be distributed tax free to purchase that home if withdrawals occur after five years, regardless of your age.
If you have a traditional IRA, someday, you'll be faced with mandatory distributions. The Roth IRA does away with that eventuality. Your money can grow tax free forever--possibly providing a lovely nest egg for you to pass on to your offspring.
Before you decide to rush out and open a Roth, there's more to the story. If you're hoping to roll money directly from a 401(k) plan to a Roth, you can't--without a penalty. What you can do is roll it over to a regular IRA and then convert that account to a Roth. To qualify for the conversion, your adjusted gross income must be less than $100,000. Since money that goes into a Roth account must be after-tax money, you must pay tax on the money that will be converted.
To qualify for Roth IRA contributions, a single person's adjusted gross income (AGI) must be less than $95,000, with benefits phasing out completely at $110,000. For married couples filing jointly, the AGI must be less than $150,000. The contribution amount is decreased by 30 percent (35 percent if 50 or older) until it is eliminated completely at $160,000 for joint filers.