Roth IRA Rules

Roth IRA accounts are traditionally used as retirement savings accounts. They allow limited contributions to be made throughout the tax year and can be withdrawn within 5 years after establishing the account provided you are aged 59 1/2 or older.

Roth IRA accounts can be an effective, cost effective way of saving for retirement years but not everyone can qualify to pen an account. There are some rules to be followed in order to be deemed eligible as a Roth IRA account holder.

Basic Rules

Income Resources from Work

Those who work for a living can contribute to a Roth IRA account. The income must be derived from actual work efforts and compensation in the form of wages, tips, salaries, bonuses and professional fees. There are limits on the amount of income one can make during a given year. The limits do change from year to year.

The 2010 limits are:

• $105,000 - for those filing Single, Head of Household, or Married Filing Separately (not having lived with spouse during the year.) For gross adjusted income exceeding $120,000, contributions are no longer allowed.
• $167,000 - for those filing Jointly. For gross adjusted incomes in excess of $177,000, contributions are no longer allowed.
• $10,000 - for those filing Married Filing Seperately (and have lived with spouse during the year). For gross adjusted incomes exceeding $10,000, contributions are no longer allowed.

Contribution Limits

A Roth IRA account holder can contribute only up to a certain amount between January 2 and the tax deadline date of April 15th of the following year ($5000 in 2010). The contribution limits also change with inflation. Account holders 50 and older have the advantage of making additional catch up contributions ($1000 in 2010).

Spousal Contributions

Provided one spouse has compensation income, the other spouse is eligible to contribute to a Roth IRA account if the couple files jointly on their taxes.

No Age Limits

As long as a person has verifiable income from work performed they are eligible to open a Roth IRA no matter their age and age is not a factor during contribution years. Even minors can establish and contribute to a Roth IRA.

401k Plans Not a Factor

If you maintain and contribute to a 401k or 403b plan through your employer, it will not affect the amount you can contribute to your Roth IRA fund.

Conversions Unaffected

If you have converted to a Roth IRA, you are still able to make regular contributions during the year of conversion.

Contribution Reductions

Your ability to contribute to a Roth IRA can be affected by your income increasing during the year. In the event a person exceeds the income limits per the Roth IRA, they will no longer be allowed to contribute to their fund unless the limits rise or their personal income decreases.

If you are unsure if you meet the eligibility requirements, you should consult with the financial institution to discuss the Roth IRA account or seek guidance from a financial advisor before attempting to open a Roth IRA account towards retirement. In the event you do not qualify for a Roth IRA account, there may be other options more conducive to your financial situation.