Roth IRA Rules and Information

To be prepared to face retirement years, individuals are strongly encouraged to invest early in an individual retirement account (IRA). The traditional IRA and the Roth IRA are both individual retirement plans but with one significant difference. Money placed into a Roth IRA has already been taxed. Once you have opened your Roth IRA, you can invest in virtually anything. Primary investment vehicles are stocks, bonds, mutual funds, and real estate.

When the individual withdraws the money at retirement, the money can be withdrawn without any taxes being withheld. A traditional IRA receives full tax deductibility, but when the money is withdrawn at retirement the individual is taxed at the ordinary rate of income. That difference is significant.

Applying for a Roth IRA is a simple matter. The easiest way to apply is through a reputable financial institution. Your personal bank or credit union can usually provide all the information that you require to open a Roth IRA. You will probably be required to make an initial deposit into your Roth in order to open it.

Another easy way to open an account is to go online and search for Roth IRAs. You will find a number of options available. When using an internet company for your investments, be sure to do your research. Make sure that the company you are dealing with is sound and reliable. Most large brokerage companies have a lower investment minimum for Roth IRAs than for other investments.

The rules pertaining to a Roth IRA are pretty simple. These rules are broken down here.

Eligibility Rules –

  • Anyone can open a Roth IRA. There are no age limits or restrictions.
  • To open a Roth IRA, the individual must have taxable compensation. Compensation can be in the form of salaries, bonuses, tips, and fees.

Compensation Rules –

  • The compensation rules change from year to year. Compensation is based on a participant’s adjusted gross income. The following are limits for 2011.
  • Those taxpayers who filed as “Single” participants, “Head of Household,” or individuals who filed their income tax return as “Married, Filing Separately” can make a full contribution providing their individual adjusted gross income does not exceed $107,000.
  • Individuals who filed federal income tax returns as joint filers can make a full contribution as long as their income does not exceed $169,000 annually.
  • Individuals who filed as “Married Filing Separately” while living with their spouse cannot make a Roth IRA contribution if their adjusted gross income was more than $10,000.

Once your filing status has been established, it is easy to determine just how much money you can contribute to your Roth IRA. The annual contribution amount for most individuals is $5,000. There are catch-up rules in effect for participants over the age of 50. Those individuals may contribute up to $6,000 per year.

Transfer Rules –

Participants have the option of transferring their IRA proceeds to another IRA account. This transfer is often referred to as a rollover. There are several ways to accomplish a transfer or rollover.

  1. Participants can ask the custodian of their traditional IRA to transfer those funds to another institution that is managing his or her Roth IRA.
  2. A traditional IRA can be transferred to a Roth IRA within the same institution by simply re-designating the IRA as a Roth IRA.
  3. A rollover occurs when funds are withdrawn from a traditional IRA and moved to a Roth IRA within 60 days from the date of distribution.

If the transfer fails for any reason, the participant may be subject to an addition tax of 10 percent. It is extremely important to ask for guidance from your financial institution before attempting any transfer or rollover.

Roth IRAs are intended to be held until normal retirement age. That age is generally 59 ½ or at least five years after the Roth was initiated. Early withdrawals are discouraged and are subjected to a penalty of 10%. There are some exemptions from these penalties. Some of these exemptions apply to participants who:

  • Are disabled
  • Are first-time home owners
  • Are using the money to pay for higher education expenses

A Roth IRA is a valuable investment tool for retirement. Participants are encouraged to begin an individual retirement account as early as possible. However, it is never too late to begin a retirement plan. Talk to a qualified financial consultant for more information.