Saving for retirement shouldn’t be difficult, and with the Roth IRA, it’s not. In 1998 the Roth IRA was developed with the middle class in mind. It was designed as a way for people to be able to start saving for retirement as part of the Tax Relief Act of 1997. The Roth IRA gets it’s name from it’s legislative sponsor, Mr. William V. Roth, Jr. Here’s what you need to know about the Roth IRA qualifications.
There are two areas that impact your ability to open and contribute to a Roth IRA. These are age and income level. Because the Roth IRA was developed for the middle class, there are income restrictions. If you are a single person making a six-figure salary, the Roth IRA is not for you, and you should be looking at employee sponsored retirement programs or another form of savings.
To be eligible for a Roth IRA you modified adjusted gross income must be below the limit allowed for your filing status. (based on reported 2009 figures)
- For those filing single or head of household: $105,000
- For those filing jointly as married: $166,000
- For those filing single but married: $0
These figures are adjusted annually to give consideration of cost of living increase. There are also some exceptions allowed for reduced contributions if your income is only slightly over the income limits. You must also have taxable income in order to be able to contribute, and are only allowed to contribute the maximum amount allowed for your age or income, whichever is less. For example if your taxable income for the year is only $2000, the maximum amount you can contribute is $2000.
As long as you do not exceed the income requirements, you are allowed to start contributing to a Roth IRA at any age. However there are limits on how much you can contribute each year. These figures are based on maximum allowed 2011 contributions. The amount allowed increases by $500 each year to take into consideration cost of living increases.
- For those who are under age 50: maximum contribution is $5000
- For those who are over age 50: maximum contribution is $6000
Unlike a traditional IRA, the money can be left in a Roth IRA account indefinitely. However, it can not be withdrawn until 6 months prior to your 60th birthday without a 10% penalty. There are some exceptions to this rule, such as if there are medical expenses, or disabling conditions that would require the use of the money. Some people never need the money in their Roth IRA and leave it for their heirs.
Roth IRA’s were designed for people who do not have other ways to contribute to their retirement savings. If your employer offers a 401(k) or a 403(b) those options should be used first. Free contributions from an employer should never be passed up. However, if you are looking for an easy way to save for retirement and get the most of your IRA interest rates, the Roth IRA is the way to go.