Roth IRA Rules

What are the various Roth IRA rules?

That's a great question, because...

Before you open a Roth IRA, you need to know the basic rules of the game.

Lucky for you, the IRS keeps the rules pretty simple.

The basic rules cover the following topics...

• Taxation
• Earned Income
• Age
• Income Limits
• Contribution Limits
• Withdrawals
• Investment Options

Learn what the IRS says about the Roth IRA rules for each of these topics, and you'll know just about everything you ever need to know about the rules governing a Roth IRA...

Tax Treatment for a Roth IRA

You must fund Roth IRA contributions with after-tax income.

Unlike a traditional IRA, a Roth IRA is NOT tax deductible.

However, this disadvantage is easily offset by the future tax-free growth and tax-free withdrawal of those same contributions...

That's right...

Once you fund a Roth IRA, you never have to pay income taxes or capital gains taxes on the invested funds or subsequent investment gains ever again!

For example, let's say you fund your Roth IRA with $1,000 in after-tax income. You use that money to purchase $1,000 worth of stock. After three years, the stock is worth $2,000.

You sell it.

But instead of paying capital gains tax on the $1,000 gain, you pay zero tax. You can then reinvest the entire $2,000 in something new...

Thirty years later, when the $1,000 is worth $15,000, you can withdraw the entire $15,000 and not owe a single penny in taxes!

Roth IRA Earned Income Rules

In order to contribute to a Roth IRA, the IRS requires you have earned income during the taxable year of the contribution...

And the amount of your contribution can NOT exceed your earned income for the year.

If your primary source of income is from a current job or business, this shouldn't be a problem...

However, if you're retired and living off of a pension or social security, you can only contribute from your earned income.

Got that?

You can't contribute funds from your social security check to a Roth IRA.

Also, if you're a minor, you can't contribute gifts from grandparents or family members... Only the money you earn and report as taxable income.

Roth IRA Age Requirements

IRS regulations don't dictate a minimum or a maximum age for opening or investing in a Roth IRA.

But the IRS does require the Roth IRA account holder to fund the account with earned income.

So, if you're a five-year-old with earned income from a lemonade stand...

Or a ninety-two-year-old with earned income as the local Wal-Mart greater...

Then you meet the age requirements to open and contribute to a Roth IRA!

In short, there is no Roth IRA age requirement, just an earned income requirement.

Roth IRA Income Limits

Eligibility to open a new Roth IRA or contribute to an existing one is limited to people whose income falls within a certain range.

So what's your income?

Your "income" in the eyes of the IRS is the same as your Modified Adjusted Gross Income (MAGI)...

So that begs the question... what in the world is Modified Adjusted Gross Income?

It's nothing more than government bureaucrat language which means "your personal income."

Look at your IRS Form 1040 (the one you use for filing income taxes). Find the number for Adjusted Gross Income (AGI).

Once you add back certain items to your AGI, you'll come up with a figure for your MAGI. Then you'll be able to see if you meet the income limits for a Roth IRA.

Click here to learn more about Modified Adjusted Gross Income (MAGI) and how to calculate it.

Anyway, once you figure that out, the Modified Adjusted Gross Income (MAGI) limits for a Roth IRA are as follows:

• $176,000 for married individuals who file a joint tax return.
• $10,000 for married individuals who file a separate tax return and lived with their spouse at any time during the course of the tax year.
• $120,000 for individuals who file as:

• Single
• Head of household
• Married filing separately and did not live with their spouse at any time during the course of the tax year.

Roth IRA Contribution Limits

The annual contribution you can make to your Roth IRA is limited by IRS rules.

As of 2009, you can make an annual contribution of...

• $5,000 if you're under the age of 50 and don't exceed the income limits
• $6,000 if you're over the age of 50 and don't exceed the income limits
• A dollar amount which varies somewhere inbetween as you approach the upper income limit
• Zero dollars if your income exceeds the upper income limit

Roth IRA Withdrawals

Unlike a traditional IRA, you can withdraw previously contributed principal payments from a Roth IRA without incurring an early withdrawal penalty...

For example, let's say you open a Roth IRA and contribute $2,000.

One year later, the account is worth $2,500.

Under IRS rules, you can withdrawal up to $2,000 without incurring a penalty...

But the $500 investment gain can't be touched.

Withdrawals of investment gains are a different story, though.

In order to withdraw investment gains without penalty, you generally need to meet two requirements...

1) The funds have been in the account at least 5 years

2) You've reached the age of 59 ½

However, there are exceptions to these rules.

They're called qualified distributions, and they allow you to withdraw funds without penalty for special purposes, such as funding of education expenses and the purchase of a first home.

Just be sure to do your homework before taking advantage of one of these special exemptions... You don't want to get hit with surprise taxes or penalties from the IRS. So just remember, it's always a good idea to consult with your accountant first.

Roth IRA Investment Options

As a general rule, you can fund your Roth IRA with any combination of the following investment vehicles...

• Common Stocks
• Bonds
• Mutual Funds
• Certificates of Deposit (CDs)
• Exchange Traded Funds (ETFs)
• Money Market Accounts
• Savings Accounts
• Treasury Inflation Protected Securities (TIPs)
• Real Estate Investment Trusts (REITs)
• Platinum, Gold, and Silver Coins

While the range of asset classes is wide and varying, not every traditional investment option is available for your Roth IRA.

A few investments you can NOT fund your Roth IRA with include...

• Collectibles (Priceless art, classic autos, antiques, stamps, etc.)
• Cash Value Life Insurance

Conclusion

As a general rule, if you and your spouse combined earn less than $166,000 per year, then you meet the requirements for making a maximum contribution to your Roth IRA.

All other individuals need to investigate further...

But don't get frustrated!

This site is adding new information resources on a regular basis, so you should be able to find the answer to your Roth IRA questions here.

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