Important Facts About the Roth IRA
- Contributions are made with post-tax dollars (i.e., are not deductible on your tax return). However, earnings grow tax free, and you do not have to pay any taxes on qualified withdrawals, unlike with a Traditional IRA.
- In order to contribute to a Roth IRA, you must have earned income. If you do not have earned income, but your spouse does, he or she can contribute to an IRA on your behalf. The amount you can contribute yearly is the lesser of your earned income or the contribution limit. For 2010, the contribution limit is $5,000 for those age 49 and below and $6,000 for those age 50 and above.
- The Roth IRA is only available to those whose income is below a certain level:
- Single filers with a modified adjusted gross income (MAGI) of up to $105,000 qualify for a full contribution; incomes of between $105,000-$120,000 qualify for partial contribution.
- Joint filers with a MAGI of up to $167,000 qualify for a full contribution; incomes of between $167,000-$177,000 qualify for partial contribution.
- Unlike with a Traditional IRA, you can continue to make contributions past the age of 70.5 as long as you have earned income. You are also not required to take distributions once you reach that age.
- You can withdraw contributions from a Roth IRA at anytime without paying taxes or a penalty.
- You do not have to pay taxes or a penalty on a withdrawal of earnings if the following circumstances are met:
- The withdrawal occurs more than five years after you first contributed to a Roth IRA; and
- You are at least 59.5 years old or disabled, you die and the funds are paid to your beneficiaries, or the funds are used to purchase a first home.
- Withdrawals of earnings that do not meet the above qualifications are subject to regular income taxes and a 10% early withdrawal penalty. The early withdrawal penalty is waived if you are disabled or die; the funds are used to pay for qualified higher education expenses, a first-time home purchase, unreimbursed medical expenses above a certain amount, health insurance if you lose your job, or a levy by the IRS; or you take “substantially equal periodic payments”.
Converting from a Traditional IRA to a Roth IRA
Taxpayers can roll over assets from a traditional IRA into a new Roth IRA. Once rolled over, these assets continue to accumulate tax-deferred until withdrawn. Income taxes will be imposed on the taxable amount that is rolled over, but there is no early withdrawal penalty.
Can I have both?
Individuals can have both a Traditional IRA and a Roth IRA, but they cannot contribute more than the combined maximum to these accounts (for example, in 2010 an individual age 49 or below may contribute a total of $5,000 to both IRA accounts, not $5,000 for each account). Individuals who are not eligible for deductible contributions to a traditional IRA or are not eligible for a Roth IRA may still make nondeductible contributions to a traditional IRA.