Roth Ira Rules: Invest For As Long As You Want
Kathy is a single, 44 year-old worker who just recently decided shes ready to start saving for retirement
. As she contemplates on the pros and cons of possibilities, she now thinks she should open a Roth IRA and promptly realizes that she has to familiarize herself with the many rules that opening an account entails; some of them seem very complex and complicated. But it is essential that she takes the time to understand all of them before finally acting on her decision.
This stands for Individual Retirement Account, an individual retirement plan that bears many similarities to the traditional IRA, but contributions are not tax deductible and qualified distributions are tax free. The rules relating to earned income and current contribution limits are pretty straightforward. These two factors are very important when financially planning for retirement. In order for Kathy to successfully open an account, she must meet the eligibility guidelines for earned income. It rules state that to be qualified to open an account, an individual's gross income (filing single) must not exceed $120,000 per year. Since Kathy's gross income is $72,000 per year, she is qualified and eligible to open an account. The current contribution limit is $5,000. The income limits do change each year. They are computed and altered to allow for inflation and compensate for increased living costs, so it is vital to check the limits at the beginning of each year. If Kathy stays with the current job she has, she should not have any concerns about meeting the income eligibility requirements.
Traditional IRA accounts require investors to make mandatory withdrawals when they reach a certain age; whereas Roth IRA rules do not include mandatory distribution. This means Kathy may contribute to the account for as long as she wants, without ever being forced to make any withdrawals from the account - even when she reaches 70 1/2. Instead, she can still keep making contributions, if she so choose, as long as she has a source of earned income; since Roth IRA rules regarding withdrawals and distributions allow account owners to continue saving. This is one of the advantages that make it attractive.
Kathy must be over 59 1/2 years old if she wishes to withdraw from the account and she must have had the account for at least 5 years. Seeing that shes only 44, she will have to wait at least 15 years before she can withdraw the money from the account without incurring any penalty. If she needs to take out the money sooner, she will have to incur an early withdrawal penalty, which is pegged at 10% of the amount withdrawn. These particular Roth IRA rules pertaining to withdrawals do not change at all.
Conversion of a traditional IRA to Roth IRA has become a common practice. It has many benefits and advantages that you cannot find in traditional IRA. As mentioned earlier, these benefits include tax-free withdrawals and no mandatory distributions. The rules regarding conversion are quite strict. To be eligible, the individual must not have a modified adjusted gross income (MAGI) of more than $100,000. It can be illustrated this way: Let's say Kathy had a traditional IRA account and decided she would benefit if she converted to Roth IRA; based on her current income, she would be eligible to make the conversion. However, if the person wishing to convert is married and the spouses are filing taxes separately, that person will not be allowed to make a conversion. Of course, in Kathy's case, it was not a problem at all because she is single.
There are three methods of conversion that are recognized and accepted by the IRS: same trustee transfers, trustee to trustee transfers, and rollovers. Rollovers are very common; a method that is usually performed when a person loses their job that has a retirement plan in effect. For instance, if Kathy were to leave her job which has a 401 (k) plan, she would be allowed to rollover the amount of money in her 401 (k) into a Roth IRA. There is a stipulation for this, though. Its rules state that the rollover must be done within 60 days of the distribution from the 401 (k) account.
As earlier mentioned, there are no age limits with a this. As long as the individual continues earning income, they can open an account regardless of age. If Kathy was 16 and had a job, she would have been able to open an account. As it is, being 44 and employed, she is definitely eligible to opt for it. To reiterate further, once Kathy opens her new account, she will be able to make contributions for as long as she wants; the only requirement being that she still has earned income.
by: Garen Arnold
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