Roth IRA Rules

The late Senator William V. Roth, Jr.

It’s beneficial to periodically review the Roth IRA rules to encourage you to save for your retirement and to ensure we’re not missing any key pieces of information.

Before we dive into the rules, let’s look at some Roth IRA basics.

What is a Roth IRA?

Senator William Roth of Delaware would be proud. We’re still loving his Roth IRA. The investments inside the account may have taken a hit, but the idea behind the account itself is still viewed as one of the best retirement investment vehicles around.

The Roth IRA was first established by the Taxpayer Relief Act of 1997 (of which Senator Roth was a key player).

The Roth IRA is an Individual Retirement Account that allows you to invest in securities (usually stocks and funds) and it works in contrast to a traditional IRA, from a tax structure perspective. You invest in a Roth IRA using dollars that have already been taxed. And qualifying distributions are made tax-free. Pay tax now, don’t pay it later.

Advantages of a Roth IRA

There are many advantages to investing in a Roth IRA:

Distributions, if qualified, can be withdrawn tax free upon retirement.
You are free to invest in many different types of investments. For instance, you typically have more choices than in your 401k.
Your direct contributions can be withdrawn tax-free at any time. Some people like that their money is not locked into a Roth IRA.
You are never required to withdraw from your Roth IRA. Not even in retirement.
Beginning in 2010, you can take advantage of a Roth IRA conversion.

There are more advantages, but those are the biggies.

Disadvantages of a Roth IRA

Depending on how you view it, there are a few downsides to the Roth IRA:

Contributions to a Roth IRA are not tax-deductible.
Your income may prevent you from participating in the Roth IRA.
They may change the rules down the road. It’s no secret that our Government is only getting more expensive to run. What if they tap into Roth IRA earnings in the future?

Based on those negatives, do you think the Roth IRA is for you?

Roth IRA Contribution Rules

You are allowed to contribute $5,000 per year to the Roth IRA (in 2011). If you are age 50 and up, that number rises to $6,000. You can make these contributions up until you file your taxes. Therefore, for 2011, you’ve got until April 15, 2012 to contribute the $5,000 to your Roth IRA.

Income Rules for the Roth IRA

Like I said above, the rules require you to make below a certain income to be able to participate (gotta love progressive tax rates). The income limits for 2011 are:

Filing Single: Up to $107,000 (full contribution); $107,000-$122,000 (to be eligible for a partial contribution)
Filing Jointly: Up to $169,000 (full contribution); $169,000-$179,000 (to be eligible for a partial contribution)

Do you think it’s a good idea to have income limits on Roth IRA contributions?

You Should Contribute to a Roth IRA

Overall, the Roth IRA is an excellent tool to help you achieve a comfortable retirement. It allows you flexibility with your investment choices and it diversifies your tax burden. Used in combination with your 401k or Traditional IRA, it becomes a powerful piece of your overall retirement plan. Get started – Learn How to Open a Roth IRA now.

Don’t need to wait? There are several places you can visit directly and open a Roth IRA. See this list of the best online stock brokers for cheap stock trading.

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Last Edited: February 3, 2012 @ 12:43 pm

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J. Money

It was named after a real "Roth"?! Haha that is awesome....that guy's a baller. Good stuff my man, as always.

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@Mike "Do you have any idea why Congress saw fit to put this limitation in place?"

So that this would be seen as a tax break for the middle class, and not the rich. It's progressive taxation. i.e. the rich make enough already, they can handle their own retirement needs without tax breaks.

My questions was somewhat rhetorical. If you poke around this blog enough you can see I'm not a fan of progressive taxation. It's simply not fair. And I'm not even a rich guy.

This bill was passed back in 1997. Clinton had just won his second term, but the Republicans ran the Congress. I suspect the income limit was a Clinton administration injection in exchange for signing the thing.

Mike Dunham

"Do you think it’s a good idea to have income limits on Roth IRA contributions?"

I'm always hesitant to answer questions like this without knowing the policy reason for the limit. Do you have any idea why Congress saw fit to put this limitation in place?

To answer the question, though, since there is a limit to how much can be contributed, I would think there is no useful purpose served by disallowing higher-income households to take advantage of this.