Roth IRA Rules

Understanding the rules of Roth IRA of income limits & contribution limits and distribution & withdrawal rules

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Understanding Roth IRA Rules

Powerpoint slides on a superior retirement planning strategy called Roth IRA on Roids which allows for tax-free distributions, tax-free growth, guaranteed principal and guarateed death benefits.Jane, a single 43 year old worker, has decided she needs to begin to save for retirement. After weighing the pros and cons, she has decided to open a Roth IRA account. As we well know, a Roth can help prepare and financially plan for retirement. Jane realizes there are many rules she must become familiar with before making the final decision to open the account. Some of these rules can be complex and complicated, but it is important to take the time to understand all of them.

Roth IRA Rules on Income and Contribution Limits

The rules relating to earned income and current contribution limits are pretty straight forward. These two factors are very important when financially planning for retirement. Currently, the contribution limit for a Roth IRA is $5,000. This means that when Jane opens her new account, she will be able to contribute a maximum of $5,000 per year. In order for Jane to successfully open an account, she must meet the eligibility guidelines for earned income. Roth IRA rules state that an individual may not earn more than $120,000 per year in gross income. Jane is aware of this number. Since she makes $72,000 per year, she is qualified and eligible to open the account. The income limits do change each year. They are altered to compensate for increased living costs, so it is important to check at the beginning of each year to see what the limits are. If Jane stays with her current job placement, she should have no concerns about meeting the income eligibility requirements.

Roth IRA Rules on Distribution and Withdrawal Rules

Traditional IRA accounts require investors to make mandatory withdrawals when they reach a certain age. Roth IRA rules do not include a mandatory distribution. This means that Jane may contribute to the account for as long as she wants, without ever being forced to withdraw from the account. When Jane turns 70 ½, she will not be required to withdraw from the account. Instead, she can keep making contributions as long as she has a source of earned income. Roth IRA rules regarding withdrawals and distributions allow account owners to continue saving. This is one of the benefits that make a Roth IRA attractive. If Jane does wish to withdraw from the account, she must be over 59 ½ years of age and she must have had the account for at least 5 years. Seeing as she is only 43, this means Jane will have to wait another 16 years before she can withdraw money from the account without a penalty. If she does need to take the money sooner, she will incur an early withdrawal penalty. The penalty is 10% of the amount withdrawn. The Roth IRA rules pertaining to withdrawals does not change.

Roth Rules on Transfers and Conversions to a Roth IRA

Converting a traditional IRA to a Roth IRA is a common practice. A Roth IRA has many benefits that do not come along with the traditional IRA. An example of these benefits is the fact that there are no mandatory distributions and that any withdrawals are tax-free. The rules regarding a conversion are strict. To be eligible for the conversion, the individual must not have an adjusted gross income of more than $100,000. For example, if Jane had a traditional IRA account and decided she would benefit from a Roth IRA, based on her current income, she would be eligible to make the conversion.

If the person wishing to make the conversion is married and filing taxes separately, that person is not allowed to make a conversion. In the case of Jane, this rule would not apply because she single. There are three methods of converting that are recognized and accepted by the IRS. These include same trustee transfers, trustee to trustee transfers and rollovers. Rollovers are very common. This method is usually performed when a person loses their job which had a retirement plan in effect. For example, if Jane were to leave her job which has a 401(k) plan, she would be able to rollover the amount of money in her 401(k) into a Roth IRA. Roth IRA rules do state that the rollover must be performed within 60 days of the distribution from the 401(k) account.

Roth IRA Rules on Age Limits

As mentioned earlier, there are no age limits with a Roth IRA. As long as the individual has earned income, they can open an account regardless of age. If Jane was 16 and had a job, she would be able to open an account. Being 43 and employed, she is eligible for the new Roth IRA. In addition, once Jane opens her new account, she will be able to make contributions for as long as she wants. The only requirement is that she has earned income.

Rocco Beatrice, CPA, MST (Master of Science in Taxation), MBA (Master of Business Administration), BSBA (Management/Accounting), CWPP (Certified Wealth Preservation Planner), CMMB (Certified Mortgage Broker), CAPP (Certified Asset Protection Planner), Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an asset protection, award-winning trust, estate planning and tax expert.

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