Are you familiar with Roth IRA Rules?
Roth IRAs are one of the most popular retirement plan options around because they offer a wide variety of investment opportunities and exceptional tax benefits. A Roth IRA is a tax advantaged retirement account that allows individual investors to make contributions with after tax dollars into an investment account where the contributions will grow without the drag of taxes until they can be withdrawn tax free in retirement at age 59½ or later.
But there is more to it than just that. Be sure to read these Roth IRA Rules for more information:
Roth IRA Eligibility Requirements
There are two main Roth IRA eligibility requirements to keep in mind: you must have earned income and you must meet income eligibility requirements. The earned income must be taxable income and can include income such as wages and salaries, tips, bonuses, and other compensation directly related to a service you provided. Income from interest, dividends, or other investments does not qualify as earned income for Roth IRA purposes.
There is also a cap on how much you can earn and still be able to contribute to a Roth IRA. For the 2010 tax year, Roth IRA eligibility begins phasing out at an annual Modified Adjusted Gross Income (MAGI) of $105,000 for single tax filers. Single tax filers are no longer eligible to contribute to a Roth IRA when their income reaches $120,000. The limits are higher for married filing jointly. Eligibility begins phasing out at $167,000 and ends at $176,000.
Roth IRA Contribution Limit Rules
Contribution limits for both Roth and Traditional IRAs are the same. For 2009 and 2010, the limit is $5,000 for those under age 50. Those age 50 and older can make a catch-up contribution of up to an additional $1,000, for a maximum of $6,000. It is important to note that these limits apply across all IRAs opened during the specific tax year. Since you can open both a Traditional and Roth IRA in the same year, you should be careful not to exceed contribution limits across both accounts. IRA contribution limits have not yet been established for 2011. The following chart shows IRA contribution limits for 2009-2011.
|Tax Year||Contribution Limit||Catch-up Contribution (age 50+)|
Roth IRA Distribution Rules
Distributions are one of the main benefits of using a Roth IRA compared to a Traditional IRA. As previously mentioned, distributions from Roth IRAs are tax free, whereas Traditional IRA distributions are taxable. Roth IRAs have an additional benefit over Traditional IRAs – there is no required minimum distribution age with a Roth IRA. But there are a few more rules and considerations you need to be aware of.
The first, is that you must be age 59½ to make tax free withdrawals, but you must have also left your contributions in the Roth IRA for a minimum of 5 years before you can make the withdrawal, otherwise they may be subject to a 10% early withdrawal penalty. This is known as the 5 year rule.
There are a few other Roth IRA withdrawal rules which may apply to your situation. For example, you may be able to make penalty-free withdrawals if you become disabled, if you wish to purchase your first home, or to pay for qualified educational expenses. I recommend reading more about Roth IRA withdrawal rules or consulting with a financial planner before making early Roth IRA withdrawals.