Understand Roth IRA Rules To Maximize The Tax Benefits

A Roth IRA has become a popular retirement investment vehicle in recent years. Like other retirement products, there are Roth IRA rules that must be followed for eligibility, contributions, conversions, and withdrawals from these accounts.

It is important to understand all the regulations for Roth IRA account before you open one of these for your own purposes. This will ensure you use this retirement plan to your fullest advantage and avoid any penalty.

Eligibility Rules For Roth IRA

The first question to ask when considering Roth IRA rules is whether you would even be a candidate for Roth IRA eligibility. The good news is the eligibility requirements are relatively straightforward; if you have taxable income, you can open a Roth IRA. Taxable income can be defined as salary, wages, tips, bonuses and fees, as long as you earned that income by performing a service for others.

However, criteria differs on the amount to contribute when it comes to rules for Roth IRA. You may be eligible to open a Roth IRA, but you also need to find out how much money you can put in.

Rules For Contribution Limits

Contribution limits with Roth IRA rules vary based on the amount of adjusted gross income you report to the IRS each year. If you filed a single return and made more than $120,000 in that year, you are not eligible to make a contribution to your account for that year based on contribution rules.

If you filed a joint return that year and made more than $176,000, you were also ineligible to make a contribution due to income limits. These contribution limits fluctuate from year to year, so it is important to talk to a financial advisor about what the new Roth IRA rules for 2010 contributions will be.

There are also Roth IRA limits in terms of how much you can contribute to your account each year. According to the IRS, the most you can contribute to your account in 2009 is $5000. If you are over the age of 50, your contribution limits are higher. Starting in 2009, these limits will be based on the inflation rate.

Roth IRA Withdrawal Rules

There are also Roth IRA rules governing distributions and withdrawals of the money in these accounts. Because taxes are paid on the money before it is invested into an IRA, you do not need to pay taxes on withdrawals. While you might enjoy tax free living at this stage of life, there are withdrawal rules that determine how much of your money you can take out and when.

Qualified distributions do not occur until after you have reached the age of 59 ½. Prior to this time, distributions are considered "early," and they would be assessed a 10% tax penalty on the amount withdrawn. This fee may be waived if the funds are withdrawn for educational reasons or to buy a first house.

Understanding Roth IRA rules is the first step in determining whether this type of retirement account is a good choice for you. They are laid out in a simple format for the different scenarios you may be confronted with.