Roth IRA Rules

Roth IRA rules are pretty straightforward because they fall into just a couple of categories that follow the typical scenarios that might happen along the way - eligibility, contributions, transfers, and withdrawals.  That's really just about all of the Roth IRA rules you'd encounter.

Roth IRAs and Retirement

But let's start by making sure everyone knows exactly what a Roth IRA is used for, and then we'll break down all of these rules by category.  A Roth IRA is just one of several types of Individual Retirement Accounts.  There are also traditional IRAs and SIMPLE IRAs that have slightly different advantages or groups they target, but they really all serve the same purpose.  An individual retirement account is a way that a person can put money aside for retirement.

Since all of these retirement accounts have both short-term and long-term tax implications, the Internal Revenue Service has outlined some rules to make sure abuses do not take place.  As you will soon see, some of these rules are there to protect the investor, while others are there to protect the government, so let's get started.

Roth IRA Eligibility Rules

The eligibility rules are pretty simple - anyone can contribute to a Roth IRA, regardless of age.  All you need to be eligible for a Roth IRA contribution is taxable compensation.  Compensation includes salaries, wages, tips, bonuses, fees, and any other amount you've received for providing a service to others.  Although you might be eligible to contribute to a Roth IRA, there are limits to those contributions, which bring to light the second set of rules.

Roth IRA Compensation Rules

As mentioned, to be eligible for a Roth IRA contribution in a given calendar year you need some form of compensation, but there is also an income limit on contributions.  If your adjusted gross income exceeds these limits, then you are no longer eligible to contribute to a Roth IRA.

 In 2008, the adjusted gross income limits are:

• Single filers, Head of Household or Married Filing Separately (and you did not live with your spouse during the year) with modified adjusted gross income up to $101,000 can make a full contribution.  Contributions are phased out starting at $101,000 and you cannot make a contribution if your adjusted gross income is in excess of $116,000.
• Joint filers with modified adjusted gross income up to $159,000 can make a full contribution.  Once again, this contribution is phased out starting at $159,000 and you cannot make a contribution if your adjusted gross income is in excess of $169,000.
• If your tax filing status is Married Filing Separately (and you live with your spouse) you cannot make a Roth IRA contribution if your AGI is in excess of $10,000.

 In 2009, the adjusted gross income limits are:

• Single filers, Head of Household or Married Filing Separately (and you did not live with your spouse during the year) with modified adjusted gross income up to $105,000 can make a full contribution.  Contributions are phased out starting at $105,000 and you cannot make a contribution if your adjusted gross income is in excess of $120,000.
• Joint filers with modified adjusted gross income up to $166,000 can make a full contribution.  Once again, this contribution is phased out starting at $166,000 and you cannot make a contribution if your adjusted gross income is in excess of $176,000.
• If your tax filing status is Married Filing Separately (and you live with your spouse) you cannot make a Roth IRA contribution if your AGI is in excess of $10,000.

So once we've figured out if we can contribute, the next logical question is - "How much can I contribute to a Roth IRA?  And that brings us to our third set of rules.

Roth IRA Contribution Rules

The IRS has established a set of guidelines or rules that govern the contributions to Roth IRA accounts.  The following table outlines those allowable contributions for the years 2006 through 2010:

Catch-Up Contributions

To help workers age 50 and over, the IRS has a subset of contribution rules that apply only to individuals age 50 and over by the end of a calendar year.  These contributions are called catch-up contributions.  The table above outlines the contribution limits that apply to workers age 50 and over.

Roth IRA Transfer Rules

These final two Roth IRA rules have to do with access to your money.  The first of which we are going to discuss are transfers or what is sometimes called an IRA rollover.  You can transfer traditional or a SIMPLE IRA to a Roth IRA in several different ways:

• Account-to-Account - You can ask the trustee or custodian of the traditional IRA to transfer the funds to another institution that is managing your Roth IRA.
• Same-Trustee - This is converting a traditional IRA to a Roth IRA account with the same financial institution or simply re-designating the IRA as a Roth IRA.
• Rollover - A rollover is taking a distribution from a traditional IRA and moving it to a Roth IRA within 60 days of receiving the distribution.

If, for some reason, the transfer or conversion fails, then you may be subject to early withdrawal penalties such as a 10% additional tax.  For more information on this important topic, you may want to look at our article on IRA Rollovers.

Roth IRA Distribution / Withdrawal Rules

The final rule we're going to discuss has to do with withdrawals, or distributions, from a Roth IRA.  Here there are really two forms of distributions from a Roth IRA - qualified distributions and early distributions.  A qualified distribution is simply one that happens five years after you first started to contribute to a Roth IRA and you've reached age 59 1/2.  A qualified distribution would be a "normal" distribution of funds from the account.

Early withdrawals are normally subject to a 10% additional tax penalty.  Fortunately, the IRS has made some exceptions to the 10% tax penalty.  Generally, if you are disabled, a first time homeowner, or if you are using the money to pay for higher education expenses, then you are exempt from the tax penalty.  There are several more exemptions to the 10% penalty, which are covered in more detail in our article on IRA Withdrawals.

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