A Roth IRA is an individual personal savings plan that can be used as both a financial planning tool and savings account. The IRA can be either an account or an annuity but must be designated as a Roth IRA when set up, states the Internal Revenue Service. Roth IRA rules are generally the same as for traditional IRAs, with one difference being that Roths allow for certain tax-free withdrawals.
Taxable Compensation Rule
You must contribute taxable compensation when participating in a Roth IRA. Taxable compensation is any income you receive from services rendered. It can be wages, commissions, tips, professional fees, salaries, bonuses and self-employment income.
Income Limit Rules
The IRS states you will not be eligible to make contributions into a Roth IRA if you exceed stipulated income limits. The income limits are determined by your taxable compensation and adjusted gross income. These income limits change yearly.
Your filing status is another factor used in determining your income limit. For instance, if your filing status is married filing jointly and/or a qualifying widow(er), the IRS states your taxable compensation and modified AGI (both considered income limits) must be less than a stipulated amount for you to make allowable contributions.
Set income limits also come into play if your filing status is either single, head of household or married filing separately (where you cannot live with your spouse at all during the tax year). The minimum income limit applies to those who lived with their spouse at all during the year and are claiming the filing status of married filing separately on their federal income tax return says the IRS.
Qualified Distribution Rule
To meet IRS rules, your Roth IRA must consist of qualified distributions. A qualified distribution is defined by the IRS as a "normal" distribution from your Roth that must meet two criteria. The distribution must occur later than five years after you make your first contribution into your account and must be made after you reach the age of 59 ½.
Rollover Rules
You can roll over all or part of your Roth IRA assets into another Roth IRA plan tax free, according to IRS Publication 590. This tax-free transaction, however, must be done within a 60-day period from the time you receive your first distribution. Another Internal Revenue Roth IRA rule states that you cannot roll over your Roth IRA to an employer retirement plan.
Allowable Contributions Rule
The IRS has rules in place limiting your allowable contribution amount. If contributions are made only to your Roth IRA, the amount will be limited to the lesser of your taxable compensation or $5,000 ($6,000 if you are 50 or older) for the year 2009. The $6,000 limit includes a "catch-up" contribution that must be made by the end of the year. The catch-up contribution is intended to accelerate the savings goals for older account holders. Catch-up contributions are only allowed if the plan specifically permits it. Contribution limits will be adjusted for inflation from 2010 on.
References
- J.K. Lasser's Your Income Tax 2009; Barbara Weltman; 2008
- IRS: Publication 590
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