Roth IRA Income Limits And Restrictions

Saving for retirement can seem like a daunting task for young individuals. Questions as to how money will be saved, how it will be grown as well as how much will be needed in the future are usually the ones that come up when its time to open a retirement account. A particularly safe approach to saving for this chapter of life is by investing in a Roth IRA account.

A Roth IRA is a special kind of investment account designed for people to save for retirement (hence the name Individual Retirement Account). It offers a lot of flexibility in choosing the assets that it is made up of and has many tax advantages for withdrawal when the funds are eventually used. Another benefit of an IRA is that it can accrue value rapidly assuming the stocks that it contains continue to grow at a steady and positive rate. Unlike interest earned on a bank account or cash deposit, the rate at which money can grow in an IRA varies with the market. Risk is minimized with this account through diversification of historically stable stocks and other investments.

There are many rules that govern how a person can use an IRA. These include age, income and contribution restrictions concerning the account. A person who has contributed to an IRA cannot withdrawal money from the account until age 59 and one-half without facing taxes and penalties. The current penalty for early withdrawal is 10% on the amount withdrawn as well as any capital gains or income taxes that are applicable. Once a person reaches the age of 59 and one half, they can begin to withdrawal amounts tax-free.

Roth IRA income limits change annually and vary based on a person’s tax filing status. For 2011, an individual filer must have an adjusted gross income of less than $122,000 to open and contribute to a Roth IRA. The Roth IRA income limit income limit for joint filers is $179,000 in annual income. However, income phase-outs begin at a somewhat lower level: $107,000 for single filers and $169, 000 for married filers. Depending on exactly how much a person made less than upper limit but above the phase-out limit will determine how much they are able to contribute however in general for tax year 2011 it is $5,000  for person’s under the age of 50 and $6,000 for those 50 and up. Roth IRA contribution limits are designed largely around a person’s ability to save enough money to retire in comparison with current and projected costs of living. For a somewhat out-dated but still useful description of how the phase-out limits work, check out this article from Fairmark.com.

As long as individuals can qualify for and follow the criteria such as the Roth IRA contribution limit described above, they can participate in this type of account. An IRA is a good option for retirement savings however there are others available such as employer sponsored plans. No one retirement strategy is better than another is, for every person and speaking with a financial advisor is one of the best steps to know if you are saving enough money for the future.