subject: To Roth Or Not To Roth: Understanding The Rules And Regulations [print this page] As we very well know, a Roth IRA is an excellent wealth building tool, enabling you to prepare and financially plan for your retirement. While the general information about it is common to knowledge, many of the rules and regulations associated with it remained hazy to most people. If you are one of those who have such an investment vehicle, it is essential that you comprehend these rules and be abreast with current changes and modifications as the rules change often. Also, because some of the rules can be a bit complex and complicated, it is imperative that you obtain as much explanation as you can gather. This article aims to give you just that - to give you a better grasp of the fundamental and vital information you should know about your retirement account.
You must be aware by now that there are no age limits with Roth IRA, which means that as long as you are earning taxable income, you may open an account, regardless of how young or old you are. The rule also allows you to continue your contributions to your account no matter what age you are, for as long as you want; and as long as you still have earned income. Traditional IRA does not allow such; rather, it requires that contributions be ceased and the individual take mandatory distributions, at the age of 70 1/2.
The rules of this type of IRA on your earned income and your annual allowed contribution limits are two very important sections that you have to be familiar with. To be eligible to open an account and make contributions, you must have a modified adjusted gross income of less than $120,000 in 2009. This amount may slightly increase the following year. To keep abreast of any changes in this area, it is best to check each year to see if any of the income regulations has been altered. The annual contribution limit remains at $5,000 per year until you reach the age of 50. After that comes the exception in the form of being allowed to contribute an additional $1,000 as catch-up contribution. This in effect will peg the final contribution limit for individuals over 50 years old to $6,000.
A lot of people have opted to convert their traditional IRA to Roth IRA. This is because the Roth account has many benefits and advantages that you cannot find and you will not be entitled to in the traditional IRA account; in particular, it does not require mandatory distribution; and all withdrawals are tax-free. There are certain rules, however, that must be followed when making a transfer or conversion. To qualify for such conversion, the IRS states that your adjusted gross income cannot exceed $100,000. This is the required amount for individuals who are filing with a 'single' status, those 'married couples filing jointly', and the 'head of a household' status. As per its rules, married couples who are filing separately are not allowed to make any Roth conversions.
The IRS acknowledges, recognizes and accepts three methods of converting: rollovers, same trustee transfer, and trustee to trustee transfers. Many people opt for rollover of their distributions from traditional IRA. This is allowed with the provision that such conversion takes place after 60 days of the distribution. Some people who want to avoid the 60-day waiting period, choose the other two methods of transferring instead. A same trustee conversion happens when the trustee is the same for the traditional IRA and the Roth IRA. A trustee to trustee transfer, on the other hand, involves transferring your traditional IRA to a new Roth IRA trustee.
Unlike traditional IRA, Roth IRA does not require you to make any mandatory withdrawals. After you have reached 70 1/2, you will not even be required to take any distributions from the account. In effect, this withdrawal rule allows you to keep saving until you decide to remove your money. This is one of the great advantages of this type of account. Moreover, since your contribution were made after paying taxes, all your withdrawals after the eligible withdrawal age, will be tax-free.
This is indeed an excellent way to provide tax-free IRA retirement income. As long as you are over 59 1/2 years old and have had the account for over five years, you may take distributions from the account. If you decide to withdraw distributions before the required age or your account has not reached its fifth year yet, you will be charged a 10% tax penalty for early withdrawal. The rules for withdrawal remain the same all throughout; without any changes from one year to the next.
