Senior Retirement Tips :: Roth IRA Rules
Roth IRA Rules: How Understanding the Rules Can Help You Maximize your Roth IRA
Retirement plans are excellent tax shelters, but you need to understand the Roth IRA rules and other contribution requirements to maximize those tax savings. Essentially, contributions to a retirement savings plan are made on a pretax basis – employers match employee contributions to a plan, but that "income" isn't taxable until it's received, once the employee has retired.
With a Roth IRA, the contributions aren't deductible, but income earned and future withdrawals are tax free.
To learn more about traditional and Roth IRA rules, and how to maximize your contributions and savings, keep reading.
The Roth IRA
The limit for Roth IRA contributions is $5000 if you're under the age of 50 and $6000 if you're over the age of 50. After 2008, those limitations are expected to increase in increments of $500, depending on the inflation rate.
Unfortunately, Roth IRA contributions are subject to eligibility limitations too. For example, a married couple who jointly earn between $150,000 and $160,000 or higher or a single individual who earns $95,000 to $110,000 or higher can't contribute to a Roth IRA. Instead, they must depend on a 401(k) Roth.
401 (K) Roth
Employees can now opt to make some of their elective retirement contributions Roth contributions. Traditionally, any deferred salary or 401(k) contributions were deducted from your taxable wages. However, any contributions considered Roth contributions to a 401(k) Roth are now included in a person's taxable wages, though they may be free from federal income taxation.
Roth 401(k) plans are typically more advantageous for individuals with high incomes than a standard Roth IRA account. There are no AGI (amount of your income that's taxable) limitations and the contribution limit is significantly higher (currently sits just over $15,000 and if you're over 50, that increases to $20,000). The return on investments is also potentially significantly higher.
Converting a Traditional IRA to a Roth IRA
To make the conversion from a traditional IRA to a Roth IRA, you must have an AGI (Adjusted Gross Income) of less than $100,000. If you are married, but filing separate, case conversions are typically not allowed.
And though the amount converted is considered taxable income, any future growth will be tax-free. Another benefit? There are no minimum distribution requirements at age 70.
There is good news for those who are lamenting the AGI restrictions on Roth IRA conversions. New Roth IRA rules stipulate that after the year 2010, the AGI limit on Roth conversions will be eliminated. In addition, any payable taxes owing from conversions in 2010 can be paid in two installments over the course of two years.
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SeniorRetireTips.com :: Roth IRA Rules