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Roth IRA Eligibility

It is obviously important to be aware of the Roth IRA eligibility requirements, because all too often people seem to leap to assumptions are far as the reasonably open approach to these accounts is concerned. Many people have heard that age is no barrier, and that anyone of any age can open a Roth IRA account, and then coupled with the basic income caps assume that they must be eligible. So, to clear up any confusion, let's have a look at exactly what the Roth IRA Rules are as far as being eligible to open and maintain a Roth account.

The first rule concerns itself with income. If you're not already aware of this, you will need to know that Roth IRA accounts can only accept money paid in that has come from taxable compensation, otherwise referred to as taxable income. You will not be eligible to apply for or maintain a Roth IRA account if you are planning on making contributions from sources other than income or income related earnings. Inheritance, lottery wins and such like are not permitted, since these do not qualify under income tax laws.

If you are not currently employed, and therefore have no income, or have income which is below the threshold for tax purposes and therefore cannot be deemed to have any taxable income, then you will be unable to open a Roth IRA account. If you already have an account, then it will not need to be closed. You will be able to maintain the account, but will be unable to make any contributions towards it until you are earning again.

It's also worth reminding you that if your income does change, you will need to be aware of how this might affect not only your eligibility for maintaining the account, but the exact amount you are limited to paying in as far as contributions are concerned.

As long as you do have a taxable income, regardless of how this is paid to you, then you will be able to open, and immediately begin to maintain a Roth account, as long as your income does not exceed the limitations currently valid for that year.

The income limitations will vary slightly, as each year they tend to rise in line with inflation. However, sometimes this rise does not occur, since the rises for the Roth IRA account limitations increase in increments of $1000. It may well be therefore that the cap remains fixed for two years in a row, and then rises by $1000 the following year.

For this reason, if you have decided that either you are eligible, or you are not eligible, based on your income, then it is worth making sure that you are referring to current limitations and caps, and not those from a previous year. Generally speaking, Roth IRA eligibility rules remain fairly fixed, with the only real variation relating to the precise income caps for that particular year.

There is some slight confusion with regard to what is meant by income, with some people assuming this means gross income, with others working on the basis of net incomes. The answer is that the income limits for a Roth IRA account are based on the modified adjusted gross income, or MAGI. This will be the same figure that will have been worked out during the completion of the federal tax requirement forms.

For the current year these limits are $114,000 for individuals, heads of household or who are married but submitting separate applications for individual accounts as they do not live together, $10,000 for those who are married, and whose partner is submitting the main application, and $166,00 for joint, married applications. This figure represents the total household income in this case.

It is important to be aware that once you have decided that a Roth IRA account is a suitable investment option for you, and that based on your MAGI you are eligible to apply for such an account, it is worth bearing in mind that your Roth IRA eligibility is not the only factor to consider. Your ongoing contributions must also be likely to remain eligible, otherwise you could find yourself with an open account, with money invested, but to which you are not able to add further contributions, and from which you cannot withdraw without incurring stiff penalties. Clearly, this is not an ideal situation in which to be.

Your contributions can only ever be made from earnings that are eligible compensation sources. If you work for an employer then the money that is eligible includes your basic wages or salary, any commissions and bonuses that you may acquire as well as tips or other payments made in direct relation to your employment. For those who are self employed the earnings which should be considered acceptable are those net earnings from the business, minus any deductions which have been taken into account for contributions to a retirement plan on the person's behalf, and with a further reduction of 50% of the individual's self employed tax liabilities.

Contributions cannot be made through any other source such as rental incomes or profits made through the selling or trading of property, interest or dividends, winnings or inheritance. It is important to make sure that once you open a Roth account you are aware not only of the Roth IRA eligibility requirements for the opening of the account, but for its maintenance. Failure to be aware of the ongoing need for eligibility could result in a need for roth IRA withdrawal, and this could be expensive. Although Roth IRA accounts do permit withdrawal options, depending on the exact circumstances, these could face stiff penalties.