Roth IRA Rules

Filed under Planning & Money

Have you read about this recently? The government has set up Roth IRA rules that allow you to save and earn money for retirement that won’t be taxed when you take it out. Does it sound too good to be true? Well, it isn’t. You can really save the best for last when you set up this type of savings account.

The definition of a Roth IRA, named for U.S. Congressman, William V. Roth, Jr., is a retirement savings account in which an individual is allowed to set aside a specified amount of their income, after taxes. Earnings grow tax free and can be withdrawn, tax-free, at age 59 1/2.

Allowable Contributions

In 2008, Roth IRA rules limit allowable contributions $5000. Making maximum contributions annually, while earning just a modest 8% interest, means that you could build a substantial, tax-free nest egg.

While this type of retirement savings plan may seem ideal, there are some additional Roth IRA rules that you should be aware of.

Allowable contributions must come from income that your earn from a job. If the income from that job is over $101,000, your maximum contribution will be lowered, from $5000, incrementally, according to your income amount.

Allowable Contributions

While this type of retirement savings plan may seem ideal, there are some additional Roth IRA rules that you should be aware of.

If you file a joint tax return, your combined income cap is $159,000. Above that amount and, again, your allowable contributions will be lowered accordingly.

If you are at a point in your career where your income is well below the maximum cap, but you expect to meet and exceed that cap in the next few years, you would still be well advised to take advantage of a Roth IRA. The earnings from contributions made even over a short period of time could add a substantial tax free bonus to other retirement savings.

Added Incentives

And speaking of bonuses, Roth IRA rules provide some added incentives for individuals holding these accounts. For example, you can withdraw your contributions (not your earnings*), any time, tax free. This may come in handy if you find yourself in financial dire straits. Ideally, though, this money really is for retirement and shouldn’t be touched, if possible.

If you’ve had a Roth IRA for at least five years, you can also withdraw up to $10,000 ($20,000 if you’re married), tax free to purchase a home. If you’ve had your account less than five years, you can still withdraw the maximum amount for a home, but you will have to pay taxes on it. However, there is no 10% early withdrawal penalty.

Roth IRA rules also allow you dip into your savings to help pay college expenses. You are allowed to withdraw contributions tax free, but if you take out earnings, they will be taxed accordingly, without the 10% penalty provided that the funds are being used for college.

Allowable Investments

You may notice that the definition of a Roth IRA doesn’t cover investing your contributions so that you can grow your earnings. However, according to Roth IRA rules, you are allowed to invest in almost anything stocks, bonds, CD, mutual funds and even real estate.

You can set up a self directed Roth IRA that will give you decision-making authority over investments. If you don’t care to be more involved beyond making contributions, your financial institution or investment counselor will invest your money for you. In both cases, the custodian of your account will be responsible for generating reports, regulation compliance, and other applicable paperwork.

If you follow Roth IRA rules, you can get your taxes out of the way, save and earn money and never have to give Uncle Sam another dime. That’s what I call, “saving the best for last!”

Article by Nicanor Castillo

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