I hope you don’t get too tired of me promoting the Roth IRA. It’s really one of my favorite investment accounts because of the tax benefits and the flexibility. It’s a great way to get started with your retirement investing. I’m back today with another update on the Roth IRA qualifications. There are a few to cover, so I’ll break it down into sections for you. Some would call these “rules”, but I like “qualifications”. It sounds more like you’re a member of a select club.
Roth IRA Income Qualifications
Yep. Not everyone qualifies to make contributions to a Roth IRA. Our Government, in their wisdom, decided that people in certain income levels should not be allowed to participate in this tax sheltering account. That’s your progressive taxes in action, Robin Hood!
Anyway, if you make above $107,000 as a single tax filer, your ability to contribute to a Roth IRA starts “phasing out”. And at $122,000, your ability to contribute is completely phased out. Another way of saying this is, if you make more than $122,000 in Adjusted Gross Income (the AGI on your tax return), you cannot contribute to a Roth IRA. For all you joint filers, the phaseout range starts at $169,000 and completely phases out at $179,000 AGI.
Another income qualification is on the lower end of the income scale. The rule is that you have to at least earned in annual income the amount you are contributing to a Roth IRA. So if you contribute $1,000 to your Roth IRA this year, you must have earned at least $1,000 in income and reported that in your tax return. This is a safeguard against people who might try to dump income off onto their kids, I think.
Roth IRA Annual Contribution Qualifications
Only a certain amount of annual contributions to a Roth IRA qualify. In 2011, you can contribute up to $5,000 to your Roth IRA if you are under age 50. If you are 50 and older you can contribute the $5,000, plus an additional “catch-up” contribution of $1,000. Making your total contribution $6,000. In 2011, these contribution limits are the same.
Contributions count towards 2011 limits if made by April 15, 2012 or when you file your tax return. This means you still have time to contribute to your 2009 limits.
One other thing to note here is that although you can have multiple IRAs, you can only contribute the above amounts across all accounts.
Roth IRA Withdrawal Qualifications
So when do you qualify to take your money out of a Roth IRA and when do you have to take your money out of a Roth IRA? Well, this is where the Roth IRA shines. It’s very flexible.
You can withdraw your contributions to a Roth IRA out at anytime without penalty or tax. For this reason, many people use a Roth as an emergency fund. That covers contributions. What about earnings? Well, for earnings to be withdrawn tax and penalty free, you need to satisfy the 5 year rule. Read more about the Roth IRA 5 year rule.
You can actually contribute to a Roth IRA for as long as you want to. There is no age in which you no longer qualify to keep your funds in the Roth IRA. No require distributions like other retirement accounts. There is no date in the future when you have to pull your money out. And when you do decide to take the money out, you won’t have to pay taxes on the money or earnings. You could even leave it to your heirs, who won’t have to pay taxes on it when they take the money out of the account.
Roth IRA Conversion Qualifications
The last thing I’m going to cover is the Roth IRA Conversion for 2010. Who qualifies for that? Well, prior to 2010, if you had money in a traditional IRA, you couldn’t convert it to a Roth IRA if you made more than $100,000 AGI. For 2010, you can now convert your traditional IRA funds to a Roth IRA regardless of income. To read a whole lot more about this, including why it might be a good idea, see Roth IRA Conversion 2010.