Roth IRA Rules

A Roth IRA is a unique type of savings plan that is one of the newer financial vehicles that can be used to save for retirement, a down payment for a first-time home purchase or education expenses. But Roth IRA Rules state how the money can be withdrawn tax-free from this type of savings plan.

There are really 2 sets of rules when it comes to withdrawing your contributions without having to pay taxes or penalties. The first set is as follows:
1. The distribution must be made on or after the date you become age 59 1/2; or
2. Made to your beneficiary, or to your estate, after you die; or
3. Made to you after you become disabled within the definition of the IRS code; or
4. Used to pay for qualified first-time homebuyer expenses.
The other rule is that the withdrawal cannot be made after the five-tax-year period to be considered qualified.

If you are considering opening a Roth IRA, it is important that you understand the Roth IRA rules. In the event that you would need a distribution, these Roth IRA rules would apply.

While a Roth IRA is an investment vehicle, it is reassuring to know that the money is available if you need it in case of an emergency. A Roth IRA is just one part of a diversified portfolio and is a great way to save for a child’s education.

Roth IRA Calculator

A Roth IRA is a great way to save money for retirement. The money that is deposited in a Roth IRA can be used tax-free for other expenses, as well. This makes this savings option very versatile. A Roth IRA Calculator can be helpful in determining the viability of converting a traditional IRA to a Roth IRA and there are also Roth IRA Calculators that will calculate you post-tax income from a Roth IRA.

Using a Roth IRA calculator is an excellent tool for planning for your future. These calculators are available on the internet on calculator sites and most major investment sites also contain a variety of calculators.

Here are some questions that people often need the answers to as they are contemplating making IRA investment decisions.

Can an IRA be rolled over into a qualified retirement plan (e.g., 401(k), profit-sharing, etc.)?
An IRA can be rolled over into a qualified retirement plan, assuming the qualified retirement plan has language permitting such rollovers.

Can an IRA accept rollovers from a qualified retirement plans?
Provided the IRA document permits rollovers, almost any type of plan distribution can be rolled over into it.

Are in-service distributions allowed from an IRA-based plan (e.g., SEP, SARSEP or SIMPLE IRA plan)?
There are no prohibitions on distributions from IRA-based plans. A participant can take distributions at any time. However, in addition to the distribution being taxable, it may be subject to a 10% additional tax if the participant has not reached age 59 1/2. If the distribution is taken in the first 2 years of participation in a SIMPLE IRA plan, the additional tax is increased to 25%.

Are hardship distributions allowed from an IRA-based plan?
As in-service distributions are allowed, so are “hardship” distributions, subject to the same conditions.

Must distributions be made to IRA-based plan participants who are over age 70 1/2, if they are still working? What about to the owner of the company?
Both the owner and any employees over age 70 1/2 must take required minimum distributions. Unlike qualified plans (e.g., 401(k), profit-sharing, etc.), there is no exception for non-owners who have not retired.

These are just a few of the questions that an individual may have as they are making decisions about the retirement and investment portfolio. Both Traditional and Roth IRAs should be part of any diversified portfolio.

Roth IRA Contribution Limits

Roth IRA Contribution Limits have been steadily increasing over the years since its inception in 1998. When we say contribution limits, we are referring to the amount that can be deducted on your taxes each year. You will see that this amount increases each you along with the cost of living and inflation rates.

To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP-IRA nor SIMPLE IRA can be designated as a Roth IRA. Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (defined in Publication 590) are tax free. Contributions can be made to your Roth IRA after you reach age 70 1/2 and you can leave amounts in your Roth IRA as long as you live.

In the years 1998-2001, the maximum contribution for all contributors was $2,000. In 2002-2004, it was $3,000 and $3,500 for individuals over the age 50. In the year 2005, $4,000 was allowed for people under the age of 50 and $4,500 for individuals over 50. In 2006-2007, $4,000 was the allowable contribution and $5,000 for people over 50. The year 2008, allows $6,000 for people over 50 and $5,000 for people under the age of 50. Starting in 2009, contribution limits will increase in $500 increments based on inflation.

This is a great vehicle for saving money and should be part of everyone’s retirement portfolio. Roth IRA contribution limits will continue to increase over time and hopefully will keep pace with inflation.