10+ Roth IRA rules That You Must know

Roth ira rules

Acquaintance

A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Roth IRA rules dictate that as long as you’ve owned your account for 5 years* and you’re age 59½ or older, you can withdraw your money when you want to and you won’t owe any federal taxes. Before investing into the roth ira, you should know the basic contribution rules of roth ira. Those rules and some features are mentioned below. These rules were changed and improved in 2015.

2012 Roth IRA Rules

Income Rules

  • The 2012 Roth IRA Income Limits have increased $3,000 for single tax filers and $4,000 for married filing joint filers over the 2011 levels.
  • In 2012 single filers can fully contribute to a Roth IRA if their modified adjusted gross income (MAGI) falls below $110,000.
  • For those filing “married filing joint” tax returns full contributions can be made to a Roth IRA if the modified adjusted gross income falls below a combined $173,000.
  • The contribution limit is phased out after $125,000 for single filers and $183,000 for married filing joint filers. If your income is above these limits you will not be allowed to contribute to a Roth IRA in 2012.

2012 Contribution Limits

The 2012 Roth IRA Contribution Limits remain unchanged from the 2011 limits.

All qualifying individuals may contribute $5,000 to a Roth IRA in 2011. Individuals age 50 or older may also contribute a “catch-up” contribution of $1,000.

2012 Age Rules

There are no changes to the age rules with Roth IRAs for 2012. Anyone with earned income that falls under the income rules may contribute to a Roth IRA regardless of age.

One of the benefits of using a Roth IRA over a Traditional IRA is you will never be forced to take distributions from the account regardless of age. You may begin withdrawing your earnings at age 59 and 1/2 without tax or penalty. Contributions may be withdrawn at any age without tax or penalty.

2015 roth ira rules

The year 2015 started with change and exclusive rules in roth ira rules:

ELIGiBILITY

Two things determine whether you can open a new Roth IRA or continuing to invest in an existing account:

  • Your current-year income
  • Your tax filing status.

First, you have to have “earned” income; that’s income you make from working, typically in the form of salary, hourly wages, or profits from a small business.

If you have earned income, you then need to make sure you aren’t going to make more than the federal government allows for Roth IRA account holders. The amounts differ depending on your tax status.

MAGI

The earning limits are also on based something called your modified adjusted gross income (MAGI). MAGI is calculated by taking the adjusted gross income from you tax forms and adding back deductions for things like student loan interest and higher education expenses.

Roth IRAs Special Rules

We present you some other eligibility-related features of a Roth IRA that make it special:

  • You can make contributions at any age.
  • You are not required to take a “mandatory distribution” from a Roth (traditional IRA account holders must start withdrawing money at 70 ½).
  • A non-working spouse can open a Roth IRA based on the working-spouse’s earnings (and the couple’s tax filing status).
  • You can still make your annual contribution if you also convert money from a tax-deductible account (like a traditional IRA) to a Roth in the same year.
  • You can contribute to a Roth even if you participate in a retirement plan through your employer.

5 Roth IRA Withdrawal Rules

  • Contributions: Tax free in /tax free out – An investor can take out the exact amount of his or her Roth IRA contributions at any time, for any reason without having to pay any tax or penalty – with one big caveat. The earnings from your principal cannot normally be withdrawn prior to age 59½ without paying the 10% early withdrawal penalty. Earnings can generally be withdrawn without penalties after age 59½, provided you meet the five-year rule.
  • Roth IRA five-year rule: Withdrawals from your Roth IRA will only be classified as qualified distributions if it has been at least five years since you first opened and contributed to your Roth IRA, regardless of your age when you opened it. For instance, an IRA owner can make penalty free withdrawals at age 59½, but if he or she made the first contribution at age 58, the plan participant would need to wait until age 63 to withdraw any earnings made on that portion of the original contributions.
  • Qualified Versus Non-Qualified Distributions: Before making any Roth IRA plan withdrawals, know the difference between “qualified” and “non-qualified” distributions.
  • Qualified distributions – As long as an IRA plan participant meets the five-year rule requirement (meaning its both tax and penalty free), any withdrawal is considered qualified by the IRS.
  • A non-qualified distribution is subject to taxation of earnings and a 10% additional tax unless an exception applies. For Roth IRAs, you can always remove post-tax penalty contributions (also known as “basis”) from your Roth IRA without penalty.
  • First Home Purchase Exception: There are other unique “loopholes” that enable you to take money out of a Roth IRA without fear of incurring a tax penalty. One is for a first home purchase, up to a $10,000 lifetime maximum amount, per individual IRA account. According to IRS rules, first home purchase assets can be withdrawn for the account holder, or for the account holder’s children or grandchildren.
  • For college expenses: Uncle Sam also allows penalty-free withdrawals from a Roth IRA for assets earmarked toward college expenses for the account holder, or for the account holder’s spouse, children, and grandchildren.

Thus, these are some important rules one should take a glance on it to invest in roth ira.

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