Planning Around The Roth IRA Limits

Understanding Roth IRA limits requires knowing why a Roth Individual Retirement Account exists in the first place. The IRA was created by the Taxpayer Relief Act of 1997, as a way to encourage working Americans to save money for their retirements, while offering them a tax break. In general, you avoid the usual taxes – if you meet certain criteria.

Contributions can only be made from a salary and are not available to the wealthy or those who inherit a trust fund. The Roth account is different from the standard IRA because money deposited into the Roth IRA is not tax-deductible. The current or future retiree receives a tax break on money withdrawn from the account. Standard IRA accounts give tax breaks for money that is deposited in the account.

The Roth IRA enforces contribution limits that are based on income level, tax filing status and age. The Roth IRA rules governing these limits tend to change every year, so those who are contributing to an account must stay abreast of income and deposit caps annually.

Although Roth withdrawals can be made at any time, there is a five-year waiting period before the first withdrawal can occur. To justify withdrawal, account holders must prove retirement or disability and must be at least 59.5 years old. One other justification is being a “first time” homebuyer. This allows you to do a limited withdrawal.

Unlike social security benefits, assets that accumulate in the Roth IRA can be passed on to heirs, children and spouses. If the owner of the fund dies, a surviving spouse inherits his account and can combine it with the surviving spouse’s existing Roth IRA without a penalty.

The 2010 allowable contribution for Roth IRA was $5,000 for those age 49 and below and $6,000 for those 50 and above. The income limit for single filers is up to $105,000 in order to make the full contribution allowed. Joint filers have a limit of up to $167,000 in income. Couples who are married and filing separately are typically only allowed to contribute a small amount. Contribution and income limits for 2011 have not changed.

If you have a traditional IRA in addition to a Roth IRA, it is important to remember that the contribution limit applies to the combination of both accounts. The $5,000 limit for a single filer under 49 with both types of accounts, for example, can be deposited across the two accounts – $2,000, maybe, for one account and $3,000 for the other. Make sure you understand your Roth IRA limits so that you can plan your contributions accordingly.