Roth IRA Rules

Roth IRA rules are relatively straightforward, which is a shock coming from the regulation-happy U.S. congress.  A Roth IRA is a type of tax-advantaged retirement account where distributions after a certain age (59 1/2 years old, in this case) are completely tax free.  The trade-off is that contributions are taxed as regular income the year you make them.  This is in contrast with Traditional IRAs and 401k plans where contributions are tax-free when you make them but whose distributions in retirement are taxed as regular income.

Roth IRA Rules

Roth IRA Eligibility Requirements

The only eligibility requirement on contributing to a Roth IRA is that you have taxable  compensation, including wages from a job, salaries, tips, bonuses, and any other compensation related to providing a service to somebody else.  Investment income does not count towards Roth IRA eligibility.

Roth IRA Compensation Rules

Unfortunately, Roth IRA rules include a compensation limit.  Single filers (i.e. everybody not married, filing jointly) with an annual Adjusted Gross Income (AGI) over $105,000 begin to see their contribution limit shrink until it finally disappears completely $120,000.  The limits for Married, filing jointly savers are $166,000 and $176,000, respectively.  All numbers are for the 2009 tax year.

Roth IRA Contribution Limits

Roth IRA and Traditional IRA contribution limits are the same.  Investors age 50 and higher are eligible for a $1,000 catch-up contribution this year, an amount that will be indexed to inflation in future years.

Roth IRA Distribution Rules

Roth IRA distributions are completely tax-free at the federal level after you reach age 59 1/2 (don’t ask me where the 1/2 came from) assuming your first Roth IRA contribution was at least 5 years before your first withdrawal.  Early Roth IRA withdrawals are subject to a 10% early withdrawal penalty by the IRA, however, there are some exceptions to this rule.  If you become disabled or use the proceeds to purchase your first home or pay qualified educational expenses, you are generally exempt from the 10% early withdrawal penalty.  See IRA withdrawals for more info.