- A Roth IRA offers unique tax advantages.tax forms image by Chad McDermott from Fotolia.com
When considering various retirement savings plans, many people choose a Roth IRA. Perhaps the most attractive feature of a Roth IRA is its tax-free growth. While taxpayers' contributions to a Roth IRA are not tax deductible, qualified withdrawals are tax free. Depending on a taxpayer's current and future tax brackets, tax-free withdrawals can give a Roth IRA a huge advantage over a traditional IRA or a 401k. In 2010, qualified taxpayers under the age of 50 can contribute up to $5,000 to a Roth IRA. Qualified taxpayers 50 and older can contribute up to $6,000. Before contributing to a Roth IRA, taxpayers should be aware of some income restrictions. - A taxpayer must have earned income (also called compensation) or alimony income to contribute to a Roth IRA. Earnings from an employer and self-employment income qualify as earned income. Investment income, nontaxable earnings, income deferred from a previous year and pension income are not earned income. A taxpayer cannot contribute more money to a Roth IRA than she earned during the tax year. For example, if a taxpayer earned $3,000, she cannot contribute $5,000 to her Roth IRA. She must contribute $3,000 or less.
A nonworking spouse can contribute to a Roth IRA if she files jointly with a spouse who has received compensation. - The IRS sets income limits for taxpayers making a full contribution to a Roth IRA. A taxpayer whose Modified Adjusted Gross Income (MAGI) exceeds these thresholds cannot contribute to a Roth IRA for the current tax year. In 2010, a married couple filing jointly with a MAGI of less than $167,000 can make a full contribution. An individual filing single or as head of household can make a full contribution if his earnings are less than $105,000. Married couples filing separately can make a full contribution if they earned less than $105,000 and did not live together at any time in 2010.
The IRS adjusts the income limits for inflation each year. Taxpayers can find the current limits in IRS Publication 590. - The IRS has established phaseout ranges for taxpayers whose income exceeds the set limits. A taxpayer with a MAGI in the phaseout range can make a reduced contribution to a Roth IRA. Taxpayers with a MAGI greater than the phaseout range cannot contribute to a Roth IRA. Married couples filing jointly with a MAGI of $167,000 to $177,000 are in the phaseout range. The phaseout range for individuals, heads of households and married couples filing separately is $105,000 to $120,000.
- Advertisement -
- Advertisement -
