Roth IRA Rules – Eligibility, Contribution Limits & Conversion Rules

The Roth IRA is a retirement account that allows you to contribute after-tax dollars so that your investment can grow tax-free.  Instead of getting a tax break at the time you make your contributions, like you get with a 401k, when you invest in a Roth IRA you are able to withdraw money from the account without paying any taxes when you reach retirement age.  Of course, there are limits to how much you can contribute and when you can withdraw the money in order to take advantage of the tax benefits provided by this account.  Here is what you need to know about the Roth IRA rules before opening an account.

Roth IRA Eligibility

Roth IRA rules limit your eligibility based on your modified adjusted gross income, your filing status, and the amount of income you earn from working.  If your earned income is under $5,000, your maximum contribution will be the amount of income you earned from work.  Unearned income cannot be counted toward your contributions, so if all of your income comes from Social Security, an inheritance, or other unearned income sources, you cannot make contributions to a Roth IRA.

If you make too much money, you will not be eligible to contribute to a Roth IRA either.  For those who are single, head of household, or married filing separately not living with their spouses, the full contribution can be made if your income is up to $105,000.  Over $105,000 up to $120,000, the maximum contribution is reduced.  If your modified adjusted gross income is over $120,000, you are not eligible to make contributions to a Roth IRA.

For those who are married filing jointly, the income limit for making a full contribution is $167,000, and you are ineligible if your income is over $177,000.  If your income is over $167,000 but not over $177,000, the contribution limit is reduced.  For couples filing jointly, both spouses can contribute to a Roth IRA even if one doesn’t work, but they must each have separate IRAs.  Those who are married filing separately and living with their spouses cannot make a contribution if their income is more than $10,000.

Everyone who works to earn income is eligible regardless of age.  If your baby gets a job modeling diapers for a Huggies commercial, you can open a Roth IRA for him or her and he or she can make a contribution (with your help, of course).

Roth IRA Contribution Limits

The contribution limits for the Roth IRA change from year to year.  The limit for 2010 is $5,000 for anyone under 49 and $6,000 for those who are age 50 and over.  In 2011, the Roth IRA contribution limits will be adjusted for inflation.

Roth IRA Withdrawal Rules

There are two types of withdrawals under the Roth IRA rules.  The first is a qualified distribution, which is what you take out when you are ready to retire.  These distributions are not taxable and do not incur any penalties.  For your withdrawal to be considered a qualified distribution, you must be at least 59 1/2 years old and the first contribution to your Roth IRA account must have been made at least five years ago.

All other Roth IRA withdrawals are considered early withdrawals.  Unless you qualify for an exemption, there is a 10% tax penalty on early withdrawals.  Some of the purposes that qualify for exemptions from the penalty are using the money for the down payment on your first home, using it to pay your way through college, or using it for medical bills.

Roth IRA Conversion Rules

It is possible to rollover a Roth IRA to another type of IRA.  If you do this, you will not incur a tax penalty.  However, if you attempt to do a rollover and it does not go through for some reason, it will be counted as an early withdrawal and you will have to pay the 10% penalty.  It is important that you keep up on the entire process and are continually monitoring the status.

References: IRA FAQs – Investments – Internal Revenue Service

Roth IRAs | Internal Revenue Service


Donna Morgan

Donna Morgan

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