Roth IRA Rules

A Roth IRA can be set up by anyone (within the income limits) who is eligible for a Traditional IRA, so this includes anyone who has earned compensation during the year in which they want to make a contribution.

Roth IRA Vs Traditional IRA

The primary difference between a Roth IRA and the other IRA Plans is the tax treatment of contributions and distributions. With all other IRAs the contributions can be deducted from your taxes in the year it is contributed, with a Roth IRA any contribution is made with After Tax dollars so there is no tax deduction. The trade-off for this is that while distributions from all other retirement plans are treated as taxable income when you make a withdrawal all qualified distributions from a Roth IRA are tax free. This is an amazing benefit when you think about it, the money can grow tax deferred for years and then can be withdrawn after age 59 1/2 tax free.

Additionally, you can continue to contribute to a Roth IRA beyond age 70 1/2. You can also leave money in your Roth IRA until your death, there are no minimum withdrawal requirements.

Roth IRA Eligibility Rules

Generally, you can contribute to a Roth IRA if you have taxable compensation and your modified AGI is less than:

$176,000 for married filing jointly or qualifying widow(er),

$120,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and $10,000 for married filing separately and you lived with your spouse at any time during the year

Roth IRA Contribution Limits For 2010 - 2011

The contribution limits for a Roth IRA are the same as for the Traditional IRA Contribution Limits so for 2010 - 2011 the contribution limits are $5000 if you are below the age of 50 and $6000 if you are 50+ by the end of the contribution year. As with the Traditional IRA your contribution can be split between a Traditional and Roth IRA but the combined amount can't exceed these limits.

Roth IRA Withdrawal Rules

As with the Traditional IRA qualified withdrawals can be made after the age of 59 1/2 is reached. Prior to that age there will be a 10% penalty for making a withdrawal unless it meets one of the ira withdrawal penalty exceptions.

As mentioned earlier, Roth IRA withdrawals are NOT treated as taxable income since all contributions made to a Roth IRA are done using "After Tax" dollars.

Unlike the other IRA plans there is no mandatory withdrawal clause at age 70 1/2, in fact you can continue to make contributions to a Roth IRA even after 70 1/2 so

Roth IRA Conversion Rules

Those who would like to take advantage of the Roth IRA Benefits can convert their Traditional, SEP or Simple IRA to a Roth IRA at anytime.  However, since the contributions were originally deducted from your taxes you will need to claim the amount converted as taxable income.   Currently this amount can be claimed in the two years following the year of the conversion.  In other words, if you convert your Traditional IRA to a Roth in 2010 you can claim 1/2 of the income in the 2011 tax year and 1/2 in the 2012 tax year.  This tax break helps alleviate some of the pain of doing a conversion but it still can create a challenge depending upon the size of the IRA.

Additionally, you don't have to transfer your entire IRA at one time so you can do a portion of it based on how much tax burden you feel you could afford.  The same is true when you make annual contributions, you can contribute part of it to your Traditional IRA and part to your Roth as long as the total doesn't exceed your annual contribution limit.  Since Roth IRA proceeds are much more flexible when you are retirement age and Traditional IRA contributions can reduce your current tax burden both can play a beneficial role in your financial plan.

Roth IRA Benefits
Roth IRA Eligibility Rules
Roth IRA Contribution Limits
Roth IRA Withdrawal Rules
Roth IRA Conversion Rules

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