An Individual Retirement Account (IRA) is a tax-advantaged savings account intended to help you putting aside money for retirement. According to Fidelity.com, the two primary types of IRAs are traditional and Roth. The rules of a traditional IRA allow you to make tax-deductible contributions and tax-free earnings until you are ready to take the money out when you retire. If you choose to open a Roth IRA, there is not an instant tax break, but when you take the money out, it is tax exempt. Your Roth earnings are also tax free. According to Roth IRA Rules.net., a Roth IRA is the simplest form of retirement account, but it does have certain restrictions.
Contribution Cap
Under the terms of a Roth IRA, there is an annual contribution limit. The Internal Revenue Service says for 2009 you can deposit $5,000 or the amount of your taxable compensation for the year, whichever is smaller. People who are over age 50 are allowed to contribute an additional $1,000 for a total of $6,000. You are not allowed to contribute more money than you earn in a Roth IRA.
Income Requirements
To qualify for a Roth IRA, you must have earned income. In other words, money you make from investments and other nonwage sources doesn't count toward Roth eligibility. But an unemployed spouse might be eligible if his spouse meets the requirements and they file a joint tax return.
Income Limits
The IRS says Roth IRAs are limited to individuals who earned $105,000 or less for the year. A single person with an income of $105,000 to $120,000 can contribute only part of the allowable contributions. Married people can earn up to $166,000 to qualify for a Roth IRA. Joint tax filers with incomes of $166,000 to $176,000 can make partial contributions.
Age Requirements
While individuals over age 70 are not allowed to open a traditional IRA, there is no age limit to open a Roth account. In addition, you can leave your money in a Roth for the rest of your life. There is no mandatory distribution at age 70½ as is the case with traditional IRAs.
Withdrawal Rules
You are allowed to withdraw money from a Roth IRA any time unless there are extenuating circumstances such as a divorce proceeding that has put the funds on hold. You can be subject to an early withdrawal penalty if you take the money out sooner than five years from the date you opened your Roth IRA.
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