Basic Definition and Outline

IRAs were created in 1974, but it was not until 23 years later when the Taxpayer Relief Act of 1997 was passed that Roth IRAs came into existence. William Victor Roth Jr., a Delaware U.S. Senator and lawyer, was the lead sponsor for this act, and so the Roth IRA was fittingly named after him.

The Roth IRA was created in order to allow taxpaying citizens to have more flexibility with their retirement funds. This type of savings account allows several advantages that other IRAs do not that could have extremely positive expectations for your money.

A Roth IRA operates the way most retirement arrangements do, in that it is simply an account that consists of different types of investments. These investments can be in securities, stocks, or bonds; owners can use mutual funds if desired.

Differences between Other Retirement Accounts

Typically the comparisons are made between Roth IRAs and Traditional IRAs. While they share a lot of similarities, the differences make a significant impact to the effect each IRA can have for your savings.

Traditional IRAs are the ones that most people are at least a bit familiar with. You get your income and are able to contribute a part(based on your Roth IRA contribution limits) of that to your Traditional IRA, this amount grows over time and then when you reach certain conditions and start to withdraw money you pay tax on it.

A Roth IRA is almost the polar opposite of a Traditional IRA in that you pay almost all of your taxes up front. You pay income taxes on your gross income, and only then can you contribute to your investment account. However, when you withdraw this money there are only rare specific cases where you have to pay taxes or penalties, otherwise it will be tax-free, including the earnings that have accumulated.

There are some restrictions on the money in a Roth IRA, but compared to a Traditional IRA it is much more flexible in regards to withdrawals. You can take out any part of your original contributions whenever you want with no penalty or fee, and there are benefits to help you take out some earnings tax free as well like when you are buying a home. Please refer to our article on the ‘Benefits of Roth IRAs’ for detailed information on other benefits.

Q: What is a Roth IRA?

A: A Roth IRA is a relatively new type of retirement account that is in essence a modified Traditional IRA.  It is a very popular type of investment vehicle and one of the best ways for people to be financially secure by retirement.  The Roth IRA was named after its’ creator, William Roth, a senator and lawyer who advocated for more flexibility in utilizing retirement funds for all citizens.

Q: How does a Roth IRA work?

A: The main premise that the Roth IRA is built on is tax-free withdrawals.  You do of course pay taxes on your entry, but in many cases this situation is more beneficial.  Once you have contributed, the account serves as an investment vehicle by allowing you to purchase stocks, bonds, etc.  You can either handle your account yourself or turn it over to a professional for a small fee.  There is a lot of flexibility with the Roth IRA, to learn more visit our article on Roth IRA Benefits.

Q: Can i roll my Traditional IRA to a Roth IRA?

A: In the past there were limitations on converting your account based on your income, but these have been eliminated since 2010.  The only requirement to having a Roth IRA now is to have an earned income for the year.  Learn more about IRA Conversion here.

Q: When can you cash out a Roth IRA?

A: There are a lot of special circumstances that allow you to pull out money penalty free, but in general there are two conditions you must fulfill.  The first is that you must be 59.5 years old and the second is that your IRA must be at least 5 years old.  If you meet these two conditions you are more or less free to withdraw as you wish.  For more information, read Withdrawal Rules.

 Q: Can i pull money out of a Roth IRA for medical bills?

A: Sometimes you are able to do this, depending on the size of the bills.  If the cost of the treatment/expenses is over 7.5% of your taxable income, you will not pay penalties on your withdrawals.  If they are less than that you may pay penalties but not always.  In most cases you can withdraw your contributions absolutely penalty free.

Q: Can i contribute to both a 401k a Roth IRA?

A: You can absolutely contribute to both, in fact if you can you should.  The more interesting question is can you contribute to different kinds of IRAs.  In this case you are allowed to, but the total contribution (adding both account contributions together) must not exceed your maximum contribution (usually $5-6,000).

Roth IRA Benefits

• Tax Free Withdrawals – You are allowed to withdraw any contributions (money that you have put in) from your Roth IRA tax free whenever you’d like.  However any money earned in the account can only be withdrawn tax free if 5 years has passed or you are over the age of 59.5 years old.  Unlike normal IRAs which you will be taxed for withdrawals if you are under 59.5 years old, as long as the 5 years has passed you will not pay taxes.
• Conversion Rules – You are permitted to convert a traditional IRA to a Roth IRA in many circumstances, although there may be some fees, the withdrawals will be tax free after certain conditions are met.  After the standard 5 year period, you can withdraw the full amount of converted funds without any penalties.
• Flexibility – You can have both a traditional IRA and a Roth IRA and contribute to both at the same time.  You can also have a 401k as well if that makes sense for your situation.
• Family Safety – If each spouse owns a separate Roth IRA, and one of them dies, the surviving spouse can combine the accounts with no penalty.  Similarly, if a single parent dies, their Roth IRA can be passed on to one of their descendants.
• Certainty of Taxes – While it may seem like a negative sometimes that you must pay taxes on deposits, it protects you from any higher effective tax rates in the future when you wish to withdraw, so you can know with more certainty how much money you will have available to you when you are older.
• Passing on Wealth – Previously mentioned was that the Roth IRA’s assets could be inherited from the owner upon death, but to expand on that point, there is no mandatory age at which you must start withdrawing from your Roth IRA.  This means that you could simple allow your assets in the account to keep appreciating to pass onto your family if you do not need it.
• Principal Residence Benefits – $10,000 in earnings in the Roth IRA are completely tax free when the money is used to buy a house (first time buying a house).  This money can be used when the owner of the Roth IRA is purchasing the house, or can be used if a spouse or children are buying the residence as well.  There are some minor restrictions to this, but is something that should be looked into.
• Contribution Limits – Here’s a benefit that can be deceiving at first, while the total maximum contribution limit is the same for your traditional and Roth IRA, the maximum contribution for each individually is effectively different.  For example, if your maximum contribution is $5,000, and you want to put it all in a traditional IRA, you simply put in the $5,000.  However, if you want to put the same $5,000, that is in after tax dollars, which means you are really contributing $5,000/(1- Tax Rate), where your tax rate is between 0 and 1 converted from a percent.  In essence you can contribute more to your Roth IRA because you are paying the taxes on the deposit versus the withdrawal.

Roth IRA Benefits Summary

As you can see from above there are many Roth IRA Benefits, see which ones affect you and if a Roth IRA is your best choice.

Why Roth IRA Contributions are important

Everyone worries about having enough money saved up for when they retire.  One of the best ways to ensure a healthy retirement fund is through Roth IRA contributions.  A Roth IRA is arguably the best type of retirement account in the United States due to the advantages that comes with it.  Of those advantages, the most relevant is the compound interest that all accounts will have.

Compound interest takes place because you are leaving money in your account and accumulating more through low-risk investments, acting as a pseudo-interest on your account.  This means that all the ‘interest’ that you gain over time, will also gain interest, leading to exponential capital gains in your account.  Add this to the withdrawal tax rules on Roth IRA Contributions, and this type of account cannot be beat.

Where to make Roth IRA Contributions

These days the best place to set up and maintain Roth IRAs is online at any major broker.  All major brokers (Scottrade, Merrill Edge, ETrade, Zecco, TradeKing) offer online services where you can easily see updated details about your account.  When you log into your account you should be able to see past Roth IRA Contributions that you have made, the money that you have made through your account, and the fees you have paid to keep your account active(this varies between brokers, so if you haven’t set up an account yet, do your due diligence).

If you have any questions on your Roth IRA Contributions please leave a comment below.

More information about Roth IRA Contribution Limits on the homepage.

Roth IRA Contribution Limits 2011

As with every other year the Traditional and Roth IRA contribution limits are set by looking at 3 main factors: Age, Familial Status, and Taxable Income**.  The Roth IRA Rules 2011 article will give you a brief overview of why these matter.

**Please note that your taxable income (sometimes referred to as your modified adjusted gross income) can be found using your 1040A tax form, which takes into account deductions and expenses

Roth IRA Contribution Limits 2011 – Maximum Contribution

Please note that in each section, this is the absolute maximum you can contribute, but the actual maximum may be less depending on the other 2 factors; the chart at the end will help you combine all the factors to determine your true Roth IRA maximum contribution.

Another important property of your maximum contribution limits is that this is the maximum limit combined for both your Traditional and Roth IRAs if you have both.  So if your maximum contribution is $6,000, you can only contribute a total of $6,000 between the two IRAs.

Finally, no matter what your contribution limit is, your contribution must come from your taxable income.  So even if your limit is $6,000, if you only made $3,000 during the year you can only contribute up to $3,000.

Roth IRA Contribution Limits 2011 Factor 1 : Age

There are two main categories for age that you can fall into, for your Roth IRA contribution limits in 2011, these are: Under 50, Over 50.

Under 50: If you are under 50, you are slightly more limited as to how much you can contribute.  Your Roth IRA Maximum Contribution is $5,000.00.

Over 50: If you are over 50, you are given an extra cushion so that you can ‘catch-up’ if needed.  Your Roth IRA Maximum Contribution is $6,000.00.

Roth IRA Contribution Limits 2011 Factor 2 : Taxable Income

Your Taxable income affects your Roth IRA contribution eligibility depending on what bracket you fall into.

Under $107,000: If you fall into this bracket you can contribute the maximum depending on your familial status.

In-between $107,000 – $122,000: If you make this amount, you will only be able to contribute a reduced amount.

Over $122,000: You will not be able to contribute to your Roth IRA; at this point you should look into other types of retirement plans.

Roth IRA Contribution Limits 2011 Factor 3 : Familial Status

There are 3(4) ways you can file as which affect your maximum contribution limits.

Single or Head of Household:  There are no restrictions based on your familial status, your maximum Roth IRA contribution will be decided by the other 2 factors.

Married filing jointly:  If you file this way, you will need to add your 2 taxable incomes together.  Once you have done this your Roth IRA maximum contribution amount will be decided based on your combined taxable income in the following manner:

Under $169,000: Maximum contribution allowed

In-between $169,000 – $179,000: Reduced contribution

Over $179,000: No Contribution Allowed

Married filing separately: If you file separately, it will depend on one crucial factor, which is whether or not you have lived with your spouse at all during the year.  If you did not live with each other during the year, you are treated the same as a ‘single’.  If you did live with your spouse sometime during the year the following restrictions apply:

$0: Maximum contribution allowed

In-between $0 – $10,000: Reduced contribution

Over $10,000: No Contribution Allowed

As far as the reduced contribution amounts go, this article would be extremely long to cover all the specific cases, if you have a specific question please leave a comment below and I will get back to you with an answer.  Otherwise, please continue your query using the IRS Publication 590.

Roth IRA Contribution Limits 2011 Table Summary

**Note the ( ) bracketed amounts of taxable income are for joint filings. [ ] brackets indicate income when married filing separately (If you never lived together refer to the Single row)

Reminder: Your Roth IRA maximum contribution is $5,000 if under 50, $6,000 if over 50.

Roth IRA Contribution Limits 2011 Summary

This is all the information you need to know about the Roth IRA contribution limits 2011, with your age, filing status, and modified gross adjusted income, you should be able to determine your maximum contributions; for next years article please refer to our up to date article: Roth IRA Contribution Limits 2012.

If you are looking for current information as of 2011, please refer to our detailed article that will help you determine your Roth IRA contribution limits – 2011.

Roth IRA Contribution Limits 2012

The IRS releases the information pertaining to the 2012 Roth IRA contribution limits, but these updates can be confusing to many people because of the high amount of bureaucratic jargon. However, as soon as they are released we will update this article with detailed information about what the new contribution limits are and how you are affected by them in clear concise steps.

—————————————————————————————————————————————


—————————————————————————————————————————————

Roth IRA Contribution Limits 2012 Update

As of: January 1st 2012
The IRS has announced official changes for 2012 Roth IRA Contribution Limits.  The changes announced were in regards to the income limits in 2012, below they are summarized:

• If a married couples’ joint MAGI is below $173,000 in 2012 there are no restrictions to their contributions.  If the MAGI is between $173,000 and $183,000 they can contribute a reduced amount, and finally if it is over $183,000 no contributions are allowed
• There are also changes for people filing as single or head of household, where both the lower and upper bounds have been increased from 2011.  In 2012, the cut-off is $125,000 where you are no longer allowed to contribute if your MAGI is larger than that, and there are no restrictions if you make less than $110,000.  In-between this amount and you can only contribute a reduced amounts.
• For someone filing married but separated, the limits have not changed, if you make any more than $10,000 you are not allowed to contribute to your Roth IRA.

These are the official Roth IRA Contribution Limits 2012 at this point, it is very unlikely that any more changes will occur, but if they do they will be updated on this page. For more information about your Roth IRA contribution limits visit our homepage.

Roth IRA Contribution Rules Affecting Your Limits

The first thing you need to learn about are the rules that affect how much you are able to contribute each year.  There are 3 main factors that the IRS uses to determine this level: Age, Tax filing status, and Modified Adjusted Gross Income (MAGI).

Your age will determine your maximum contribution limit, which as of 2011 is $5,000 if you are under 50 and $6,000 if you are over 50.  The reason for this extra cushion is so people can ‘catch-up’ if needed during the last period of their career to set themselves up securely for retirement.

Depending on whether you file as Single, Married- jointly, or Married-separated, there are different income brackets that will determine your contribution levels.  The worst filing status from an owner’s perspective is married but separated.  It is here that your maximum contribution is almost always limited, if allowed at all.  Please note however, that if you have not lived together at all for the year your essentially considered ‘single’ for the purposes of your contribution.

If you would like more detail on how to determine your exact Roth IRA Contribution Limits – 2011, please visit our other articles.  Similarly, our page: Roth IRA Contribution Limits 2012 will always be up-to-date.

Rules For Contributions to IRAs

Trad vs Roth

It is also important to make note of the IRA contribution rules when you have more than one type of account.  You are allowed to contribute to more than one account, but this limit cannot exceed your maximum contribution.  For example, if your maximum contribution is $6,000, you could contribute $3,000 to both your Traditional IRA and your Roth IRA, but if you put $6,000 in your Roth IRA you would not be able to contribute to your traditional account.

When and Where to Make Contributions

Finally you need to know when and where to make your Roth IRA Contributions.  You MUST make your contributions before the tax deadline of the following year, which is usually in mid-April.  For example, in most states this year the deadline is April 17, 2012.

In regards to where to make your contributions, please read the following article, about Roth IRA contributions, which will explain where you can set-up and how to manage your account.  In most cases it’s as simple as signing onto a website and doing some online banking.

If you would like the rules that are relevant to 2011, please refer to our article about Roth IRA rules 2011.

Roth IRA Conversion Taxes

One of the most important changes of recent is that you must now pay income tax on the year’s income that you are converting from.  The reasoning for this is that you received tax deductions for Traditional IRA contributions, and must now pay taxes for your Roth IRA conversions so that your withdrawals in the future will be tax free.

Roth IRA Conversion Considerations

• Take note of your expected income situation for the current and future years.  For example, if you have suffered an unexpected pay decrease in the current year you will pay less tax if you convert.  Conversely, if you expect to make more in future years, it makes sense to convert presently to avoid paying extra taxes in the future.
• Always stay on top of tax laws and announcements.  If the government announces that there will be tax increases shortly in the future, you probably want to convert before that.  The opposite goes as well, if there are new tax breaks or cuts coming, wait for those if you are in no immediate hurry to convert.  Similarly, check every year for changes to contribution limits (i.e. for this year the Roth IRA Contribution Limits 2012).
• Make sure you only pay tax on the Roth IRA conversion if you have to.  One common mistake is that people pay tax on previous after-tax contributions (where you have already paid taxes before depositing) to their old accounts, in most cases you only need to pay taxes once!
• It doesn’t have to be one or the other between a Traditional IRA and Roth IRA.  There are no laws or rules that say you can only have one of these accounts.  It often makes sense for you to own both types of accounts for diversification purposes.  Depending on changes in your financial situation from year to year contributing to one may be better for you than the other; it is nice to have that flexibility.

After You Know Your Roth IRA Eligibility

Once you have determined that you are eligible to open a Roth IRA, you will need to start an account, so start by learning about Roth IRA contributions.

If you want to learn more about Roth IRA Contribution limits, either our homepage or the top menus will help you navigate to those section.

Roth IRA Rules 2011 – Similarities from 2010

Just as in 2010, many Roth IRA rules have remained the same in 2011.  All of the major limits and contribution rules that affect you are still decided by the same main criteria: your age, marital status, and the income bracket which you fall under.  Also, the maximum contribution that you can make has stayed the same.

Finally, a reminder that, as always, any contribution to your retirement account must be made before the tax deadline of the following year, usually April 15^th.

Roth IRA Rules 2011 – Changes From 2010

Here are always a few minor changes that occur year to year, below are the main areas that you should stay current with.

Roth IRA Rules 2011 – Changes in Contribution Limits

One of the main changes of the Roth IRA rules in 2011 is that the upper and lower income bracket amounts have changed.  The lower bound was $105,000 in 2010, and the upper bound was $120,000.  In 2011 however, the bounds are $107,000 and $122,000 respectively.  This is a change that usually occurs to mirror inflation in the national economy.  The bounds have also been bumped by $2,000 on each end if you are planning on filing as a joint married couple.

Just a brief refresher on the significance of these bounds, simply put: If you make less than the lower bound you can contribute the maximum, and if you make more than the upper bound, you are not allowed to contribute at all.  Please refer to our other articles for full detail about Roth IRA Contribution Limits in 2011.

Roth IRA Maximum Contribution

The maximum yearly contribution amount has stayed the same, $5,000 if you’re under 50 and $6,000 if you are over 50.  This maximum contribution depends on a few other factors, which are covered in detail in this article about your Roth IRA maximum contribution.

These are the main changes in Roth IRA Rules 2011, refer to our next article Roth IRA Rules 2012 for next years rule changes.