Roth IRA Rules
If you’re interested in opening a Roth IRA, it’s essential you fully understand the Roth IRA rules as this type of individual retirement account is an excellent wealth-building vehicle for anyone who is a wage earner and falls into the middle income range. Here are the rules and guidelines that you should be aware of before opening a Roth IRA.
Earned Income Only
Your main source of income should be from a current job or business and the amount of your contribution can’t exceed the income you earn during the year. So, how much are you allowed to contribute?
Maximum Contributions
You can contribute up to $5,000 per year provided you make over that amount and you’re less than 50 years old. If you’re above 50, then you’re allowed to contribute $6,000 per year as $1,000 is added to the $5,000 as a “catch-up” amount.
No Age Requirements
However, there are no age requirements with respect to opening and maintaining a Roth IRA. It doesn’t matter if you’re 18 years old or 105, you can continue to make contributions to this individual retirement account for as long as you like.
Tax-free Distributions
With a traditional IRA, you must stop making contributions at 70 ½ and begin taking mandatory distributions at that time. You also owe taxes on your distributions through this type of account versus a Roth account in which all distributions are tax-free as you’ve already paid taxes on those amounts. Therefore, although a Roth is not tax deductible, it does offer the benefit of tax-free income when you finally decide to dip into your retirement account.
Earned Wages Only
As I mentioned earlier, you need to earn an income in order to contribute to a Roth retirement account. This means you can’t make contributions to your Roth IRA from social security income or from a pension. You can only contribute wages you’re currently earning.
The Cut-off
With respect to your Roth contributions, you do have a cap on your Modified Adjusted Gross Income (MAGI). If you list yourself as single head of household or are married and filed separately but didn’t live with your spouse during the year then you can’t make more than $120,000 to contribute to a Roth account.
Other Limits
Your limit is set at $10,000 if you’re married and filed a separate tax return from your spouse but resided with him during a part of the tax year. The limit is set at $176,000 if you’re married and filed a tax return jointly with your spouse. As income limits are adjusted each year to allow for the cost of living, it’s good to check these salary restrictions annually for your Roth account.
Contributions
Therefore, if on your tax return you’re classified as single, head of household and make, say, $100,000 per year in a permanent job, you’re eligible to make a contribution to a Roth account. If you’re under 50 years old, this means you can contribute up to $5,000 per annum while you can make a contribution of up to $6,000 if you’re over 50. As stated, your contributions aren’t tax deductible but you’ll be well-rewarded upon retirement with income that’s tax-free.
Rules for Withdrawal
This brings us to the stipulations with regards to withdrawal. To make any withdrawal from your Roth account, you must hold the account for at least five years. In addition, you also must be 59 ½ years old. Therefore, if you’ve held your Roth retirement account for, say, 10 years and are 58 years old, you still can’t withdraw any funds for another year if you don’t want to pay a penalty for early withdrawal. The tax penalty for making an early withdrawal is 10% of the amount you choose to take out.
Rollovers
Because of the many advantages associated with a Roth account, a good number of people choose to rollover their current traditional IRA into a Roth. Likewise, if one loses their job in a company, they can also rollover their 401K into a Roth account. This type of transaction must be made within 60 days of distribution. To meet the requirements to rollover current retirement funds into a Roth, one can’t have an adjusted gross income higher than $100,000. Likewise, if you wish to make a conversion, you can’t be married and file your taxes separately from your spouse.
Funds Transfer
Although rolling over the funds from one account such as a traditional individual retirement account or 401K is the typical method used to convert funds, transfers can be made from trustee to trustee or by means of assignment by the same trustee from a regular retirement account to a Roth account.
Financial Freedom
You have a great deal more freedom financially if you choose to contribute to a Roth account for your retirement savings needs. Although you must pay taxes on your contributions you’re freed of that concern when you withdraw money from your account. In addition, you can contribute to the account as long as you want so, for any middle income wage earner, it’s an excellent way to save the needed money for retirement.
As can be seen, while there are many Roth IRA rules, the benefits of this retirement vehicle are impressive.