What are Roth IRA Rules?
Retirement accounts get added attention during tax-filing season. That's because you must put money in an individual retirement account no later than the April return-filing deadline to get credit for the prior year. It doesn't matter whether your contribution is to a traditional IRA or a Roth IRA.
Many taxpayers, however, find that a Roth works best for them. With a Roth account, you won't get an immediate tax break, but you won't pay any tax on your money when you eventually take it out.
The Internal Revenue Service, however, has specific rules on just who can have a Roth IRA and how much money can be contributed each year.
And new for 2010 tax returns, if you converted a traditional IRA to a Roth IRA, you must decide when you want to pay the taxes due on that account switch.
Income Limits
The first Roth IRA eligibility consideration is income. You must earn money to open any IRA. That means, if your only income is from unearned sources, such as investments, you cannot contribute to an IRA. You must get paid wages, a salary, tips, professional fees or bonuses.
And you can't put more money than you make in any IRA. So if your income is only $1,500, then $1,500 is the most you can contribute to a Roth.
There is an exception that allows Roth accounts for nonworking spouses. If you and your spouse file a joint return but one does not work, the employed spouse can open and contribute to a Roth IRA for the unemployed partner.
Generally, the contribution limits for a spousal IRA are the same as for the account held by the working wife or husband. IRS Publication 590, Individual Retirement Arrangements, has complete guidelines on opening a Roth spousal IRA.
However, know that if you make too much money, you're not eligible to open a Roth or to contribute to the account you opened when you were earning less. For a Roth, your earned income -- with some deductions you might have taken, such as for student loan interest, added back in -- must meet certain criteria.
You have until the filing deadline to make contributions to your Roth and have them count toward the prior tax year. If you've already done so for last year and now want to contribute for 2011, the income limits are $179,000 for married joint filers; $122,000 for single taxpayers; and $10,000 for married couples filing separately.
And even if you're not quite at the top of these pay ranges, your Roth contribution could be limited if your modified adjusted gross income falls within certain limits.
You still can add to your Roth in these cases, but not the full allowable amount. Publication 590 contains work sheets and examples to help you determine your reduced Roth IRA contribution amount.
Conversion Taxes
Another Roth IRA income limit ended in 2010. Previously, you could not convert a traditional IRA to a Roth account if you made more than $100,000. Now, regardless of your earnings, you can turn your old retirement account into a Roth.
Such conversions, however, mean you'll owe taxes on any traditional IRA money on which taxes were deferred.
For 2010 taxes, you have the option to delay paying these taxes. You can pay half of the due taxes on your 2011 return (filed in 2012) and the other half on your 2012 return (filed in 2013).
Married couples where each spouse converted IRAs in 2010 can make separate decisions on when to pay any taxes. For example, the wife can report her conversion on the couple's 2010 filing this year, while the husband can defer the Roth conversion taxes to 2011 and 2012 filings.
The two-year deferral is the default option. But if you decide you would rather pay all your traditional-to-Roth IRA conversion taxes on your 2010 tax return, file Form 8606. For couples where the husband and wife each converted to a Roth IRA, even when filing a joint return each spouse must file a separate Form 8606 if each decides to report the taxes on their 2010 return.
Also note that while the conversion option for taxpayers with incomes of more than $100,000 is in effect for years after 2010, the two-year conversion tax deferral is allowed only on conversions made last year. Any taxes due on 2011 or future year conversions must be paid by the time you file taxes for the tax year in which the traditional IRA is converted to a Roth.
Age Limits
Finally, one of the more appealing Roth IRA rules is that they do not have an age limit. Whereas traditional IRA contributions are barred for individuals older than 70½, you can be any age and still contribute to a Roth IRA.
And you can leave money in your Roth for as long as you live. The IRS doesn't require minimum distributions from Roths as it does with traditional IRAs.
If you find a Roth is the right IRA for you, you have until the April tax-filing deadline to open one or contribute to your existing account and have it count toward the prior year's limit. After that, the money will be counted as a contribution in the next filing season.
For complete information on Roths and definitions of terms, check out IRS Publication 590, Individual Retirement Arrangements.