What Is A Roth IRA And How Much Can I Contribute

Roth IRA

What is a ROTH IRA?

A Roth IRA is a special type of individual retirement account that is generally not subject to taxation once age 59 1/2 is reached. The ROTH IRA is funded with “post-tax dollars” which means that you pay taxes on your income as usual, and then make a contribution into the Roth IRA.

What are the Tax Advantages?

Roth IRA contributions grow tax free, and distributions are received tax free once you reach the age of 59 1/2 and the ROTH IRA has been open at least 5 years.

What are the Maximum ROTH IRA Contribution Limits?

For 2012, the maximum annual contribution for individuals under 50 years of age is $5,000. For those 50 years and older, the maximum annual contribution is $6,000.

***Age Requirements*Who Can Contribute to a Roth IRA?**

There are no age requirements to participate in a ROTH IRA.

Minimum Income Requirements

Minimum income must be equal to or greater than your annual contributions. You must also have earned income in order to make contributions into the ROTH IRA.

Earned Income includes income received from wages, salaries, tips, professional fees, bonuses, and fees received for providing personal services. Earned income also includes compensation received from commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments.

Single people whose adjusted gross income is $110,000 or less can contribute the maximum annual amount to a ROTH IRA. If your income is between $110,000 and $125,000, you can’t contribute the annual maximum, but you can contribute up to a reduced amount.

Married couples whose adjusted gross income is $173,000 or less can contribute the maximum annual amount to a ROTH IRA. If your income is between $173,000 and $183,000, you can’t contribute the annual maximum, but you can contribute up to a reduced amount.

See the table below or use the IRS worksheet to calculate your new reduced Roth IRA contribution limit.

2012 ROTH IRA INCOME AND CONTRIBUTION LIMITS
Filing Status	Your Modified Adjusted Gross Income	Annual Contribution Limit
Married filing jointly (or qualified widow(er))	Less than $173,000	$5,000*
	$173,001 – $182,999	Phase Out Limit
	$183,000 or more	Ineligible for ROTH IRA
Married filing separately and living with spouse	$0	$5,000*
	$1 – $9,999	Phase Out Limit
	$10,000 or more	Ineligible for ROTH IRA
Single, head of household, or married filing separately	Less than $110,000	$5,000*
	$110,001 – $124,999	Phase Out Limit
	$124,000 or more	Ineligible for ROTH IRA

What Types of Income Affect ROTH IRA Eligibility?

Earned income is the only income that counts towards the ROTH IRA Income Limit. Income from dividends, pensions, and rental properties are excluded.

Now that you are informed about the basic nature of Roth Individual Retirement Accounts you can begin to make some informed decisions on how and if they should fit into your own retirement plan.