Roth IRAs
The Roth IRA is arguably the IRA with the most potential. There are many similarities between the Roth and Traditional IRA, but also some striking differences.
Like the Traditional IRA, a Roth IRA is an excellent supplement to an individual's retirement savings. But, unlike the Traditional IRA for which earnings accrue on a tax-deferred basis, the Roth IRA accrues earnings on a tax-free basis. However, earnings are subject to a 5-year holding period. For Roth IRAs, qualified distributions are tax free and contributions are never tax deductible. Similar to the contributions to the Traditional IRA, making contributions to the Roth IRA are flexible, so individuals can choose when they want to fund and how much, subject to IRS limitations.
Roth IRAs are flexible and they are a popular way for individuals to save for their retirement. Roth IRAs differ, however, because assets can grow on a tax-free basis.
Any individual who has taxable compensation and meets eligibility requirements for adjusted gross income may establish and fund a Roth IRA.
Main points:
- Rental income, interest and dividends and other amounts generally excluded from employer-paid income are not eligible as compensation for contributing to a Roth IRA.
- A Roth IRA can be funded from your own contributions, spousal contributions, transfers and rollovers.
- A Roth IRA must be established with an institution - such as a bank, brokerage or other financial institution - that has received IRS approval to offer IRAs.
- All IRA contributions must be made in cash. Participant contributions cannot be made in the form of securities.
- IRAs cannot invest in collectibles but can invest in U.S. gold coins, silver coins and certain other precious metals.
- Qualified distributions from Roth IRAs are tax free, but non-qualified distributions may be subjected to tax and early-distribution penalty.
Eligibility
With a Roth IRA, there are certain eligibility requirements that must be met in order to contribute. These requirements involve your the tax filing status and your modified adjusted gross income (MAGI). See the table below for an outline of the requirements.
Roth IRA - Contributions (2007 Tax Year)
AND your filing status is... |
AND your MAGI is... |
THEN... |
Single, Head of Household, or Married filing separately  |
less than $99,000 |
You can contribute up to $4,000. For 2007, this amount is $5,000 if you are 50 or older. |
| at least $99,000 but less than $114,000 |
The amount you can contribute is reduced as explained under Contribution limit reduced in Publication 590. |
| $114,000 or more |
You cannot contribute to a Roth IRA. |
| Married filing jointly or Qualifying Widow(er) |
less than $156,000 |
You can contribute up to $4,000. For 2007, this amount is $5,000 if you are 50 or older). |
| at least $156,000 but less than $166,000 |
The amount you can contribute is reduced as explained under Contribution limit reduced in Publication 590. |
| $166,000 or more |
You cannot contribute to a Roth IRA. |
| Married filing separately |
zero ($0) |
You can contribute up to $4,000. For 2007, this amount is $5,000 if you are 50 or older. |
| more than zero ($0) but less than $10,000 |
The amount you can contribute is reduced as explained under Contribution limit reduced in Publication 590. |
| $10,000 or more |
You cannot contribute to a Roth IRA. |
| Note: The taxpayer must have earned income (from either self-employment or compensation) equal or greater than the amount contributed to the Roth IRA. For married couples filing a joint return, either spouse can have earned the required income. |
| For the most up to date information and/or help determining your eligibility for a Roth IRA, please contact your tax advisor. |
Roth IRA - Contributions (2008 Tax Year)
AND your filing status is... |
AND your MAGI is... |
THEN... |
| Single, Head of Household, or Married filing separately |
less than $101,000 |
You can contribute up to $5,000. For 2008, this amount is $6,000 if you are 50 or older. |
| at least $101,000 but less than $116,000 |
The amount you can contribute is reduced as explained under Contribution limit reduced in Publication 590. |
| $116,000 or more |
You cannot contribute to a Roth IRA. |
| Married filing jointly or Qualifying Widow(er) |
less than $159,000 |
You can contribute up to $5,000. For 2008, this amount is $6,000 if you are 50 or older). |
| at least $159,000 but less than $169,000 |
The amount you can contribute is reduced as explained under Contribution limit reduced in Publication 590. |
| $169,000 or more |
You cannot contribute to a Roth IRA. |
| Married filing separately |
zero ($0) |
You can contribute up to $5,000. For 2008, this amount is $6,000 if you are 50 or older. |
| more than zero ($0) but less than $10,000 |
The amount you can contribute is reduced as explained under Contribution limit reduced in Publication 590. |
| $10,000 or more |
You cannot contribute to a Roth IRA. |
| Note: The taxpayer must have earned income (from either self-employment or compensation) equal or greater than the amount contributed to the Roth IRA. For married couples filing a joint return, either spouse can have earned the required income. |
| For the most up to date information and/or help determining your eligibility for a Roth IRA, please contact your tax advisor. |
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