Roth IRA Contribution Limits

Roth IRA Contribution Limits
IRAs were created to encourage people to save for their retirement, by offering them a significant tax break. They are intended for ordinary working people - not, for example, the wealthy (income limits prevent them from participating), or trust fund kids too lazy to get a job (contributions have to be made from salary, not from investments or other income).
The rules for eligibility and contribution limits change every year. You can (and should) get the official rules from IRS Publication 590;
To summarize how all of the rules work:
If your status is Married Filing Separately you are effectively locked out due to an extremely restrictive limit. (The rationale: the government doesn't want to give you a tax break in case your spouse is high-income. The exception: if you and your spouse lived apart for the whole year, you get the same limits [and same bummer lifestyle] as a Single filer.)
If your status is anything else, then your contribution limit is (using 2008 numbers):
$5000 if your income is low enough (and $6000 if you're 50 or older)
zero (that is, you can't contribute at all) if your income is too high
a sliding scale somewhere in between, if your income is somewhere in between "low enough" and "too high"
In case you have multiple IRAs, the limit is the total you are allowed to contribute to all of them
And in all cases, your total contributions can't be greater than your reported salary income.

If you don't qualify...
If your income is too high to make a Roth IRA contribution, you may still be eligible for a traditional deductible IRA if neither you nor your spouse is covered by a retirement plan at work. See IRS Publication 590. (Look under "Traditional IRAs".)

Penalties
A Roth IRA is intended to be a retirement account, so penalties apply if you misuse it by withdrawing funds too early. As a rule, you should plan not to make any withdrawals until at least age 59½ or five years after you make your first contribution, whichever comes later. This rule does have exceptions: see IRS Publication 590 for details. (Search for "Qualified Distributions".)

Understanding Roth IRA

A Roth IRA is an Individual Retirement Account that provides tax-free growth. As a result, it's the simplest - and potentially the most effective - sheltered account imaginable.
The Roth Tax AdvantageTax Structure of a Roth IRA-->
Like a deductible IRA, Roth gives you the advantage of getting taxed only once, rather than twice (or more) as with a regularly-taxed investment account. Here is a summary of how it works:

Regularly-Taxed Account
You pay income tax, and then make your contribution with post-tax dollars
Your principal may be subject to taxes on dividends and capital gains as it grows
You pay capital gains tax on your gain at withdrawal

Deductible IRA

You get a tax deduction, essentially letting you deposit pre-tax dollars
Your principal grows tax-free
You pay income tax on the entire amount of your withdrawal

Roth IRA
You pay income tax, and then make your contribution with post-tax dollars
Your principal grows tax-free
You pay no further taxes on withdrawal.

The advantage of a Roth IRA over a regularly-taxed account is obvious. Either way you pay income tax up front. But with Roth, you're then done paying taxes; with a regular account you're just getting started.
The advantage of a Roth IRA over a deductible IRA is almost obvious:
Roth is simple: it requires no special reporting to the IRS. (With a deductible IRA you have to report a deduction on your 1040 form when you make a contribution; on withdrawal you report the entire withdrawal amount as taxable income.)
Roth is flexible: because you've taken care of your tax obligations up front you tend to face fewer restrictions later. (For example, you don't need to begin withdrawing your money by a set age; with a deductible IRA you're required to start making withdrawals by age 70½.)
Roth has an extra advantage if you think taxes will probably rise in the future, since you're paying now rather than later. (Of course that's a disadvantage if you think taxes will fall.)
Roth has an additional, somewhat confusing advantage that it lets you shelter more real money: the same dollar amount, but in post-tax, rather than pre-tax dollars. (The idea is that a tax deduction isn't "money you're getting back"; it's "money you aren't sheltering".) This issue is analyzed, in more detail than you probably want to see