A lucrative way to save for retirement is to take advantage of tax-deferred savings, and one of the best ways to do this is a Roth IRA. With access to cash in as soon as five years, and tax-free distributions, the individual has a chance to increase their retirement savings significantly. Read the following roth ira guidelines to learn more.
Eligibility & Contributions
For 2010, a married couple can gross up to $177,000 and still be eligible to contribute to a Roth account. This number is the AGI or adjusted gross of both couples income, and they must file jointly for taxes, however. Still, the dollar amount encompasses a large percentage of working people and is typically adjusted each year for inflation. For single filers, or those filing as the head of household, the AGI is $120,000.
The only exception to this rule is if a person is setting up an account for a blood relative or non-working spouse who has earned an income of at least $5,000 in the previous year. Contribution maximums are applicable, but gross income of the contributor is not a consideration.
The maximum contributions for 2010 are up to $5,000 for youngsters under the age of 50, and an additional catch-up deposit of $1,000 is allowed for folks over 50; or $5,000 and $6,000 respectively. If the maximum amount is not used in one year, it is not permitted to be carried over to the next year’s contributions. Allowing excess funds to enter the account is not recommended, either. Any amount over the maximum allowed will be penalized if not withdrawn within a certain time period.
Distributions
The Roth has unique distribution features. Although the minimum age for withdrawal is 59 ½, the original principle can be withdrawn at any point after it has been in the account for five tax years. Before withdrawing funds however, consult a tax professional who can delineate between principal and earnings, and determine the exact date of the fifth tax year.
For the Roth ira, there is no maximum age for distribution, and money received after the minimum age and five year waiting period is tax and penalty free. There is a 10% penalty for withdrawing the principle before the five years is up, or for taking earnings before the age of 59 ½ and 5 tax years.
Before taking early distributions, investors should realize they are losing more than 10% of their value; they lose the opportunity to let the money compound over time. The larger the amount, the more significant this intrinsic penalty can be.
Early Withdrawals
Exception to the distribution rules include qualified disabilities, using funds for higher education, buying a first home, paying beneficiaries, and paying back taxes to the IRS, among others. Each exception has additional rules to consider, so read carefully before withdrawing from the account.
As with any retirement arrangement, the best policy is to let the funds mature for as long as possible. For the Roth ira, do not touch the account until the age of 59 ½ and five tax years has passed. Follow this guideline, and the money is free and clear.
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