Roth IRA Limits
It's important to be aware of
Roth IRA limits, because although they are far more flexible than standard IRA options, there are certain restrictions or limitations. Two of these which we will look at in this article are compensation limits and income limits. This can have a significant impact on whether or not you might be eligible to open or start a Roth IRA account.
It is also important to be aware that this information relating to limits will change slightly each year, as the limits are increased slightly each year. To provide you with a rough idea of how this might continue to change, we have included some information relating to previous years' limits as well, both for compensation and also for income and the eligibility which is based on income.
Clearly, if you are eligible for a Roth IRA account you would be highly recommended to open one as soon as possible. They provide a large number of benefits. As a tax-free way of saving for your retirement, they allow people who are not on especially high incomes to be able to save effectively, without there being any limitations on your age. People of any age can open an IRA account and start saving, the only limit here being that you need to have some form of compensation.
After you reach the age of 59 and a half you are then fully entitled to withdraw from your IRA entirely tax free, or to accept distributions. In contrast with standard IRA accounts, once you reach the age of 70 and a half you will not be forced to accept a minimum number of distributions.
We mentioned earlier that income can be a limit in terms of whether or not you are eligible to open a Roth IRA account, and this is based on the fact that if you are on a high income, you may well not be able to open such an account. Essentially this kind of IRA account is specifically aimed at those on low to medium incomes.
Closely connected with this idea of an income limit is what is referred to as a phase out limit. This is an income limit or cap which would allow you to make contributions, but these would be reduced, compared to the full contributions you would otherwise be able to make.
There's some confusion as to exactly what is meant by income, with some people thinking it is gross, others think it's the net income, and people aren't sure whether your income is based before or after tax. Since income is a major one of the Roth IRA limits, let's make sure this is clear.
The Roth IRA eligibility is not based on your gross income. However, here is where it can be a little confusing, because it is based on your adjusted gross income. Uncertain of what the difference is between a gross income and an adjusted gross income?
An adjusted gross income, more usually referred to as an AGI is the amount you earn after calculations have been made in order to comply with federal income tax requirements. This is usually included on the Form 1040 before being sent to the IRS.
You may well either find your employer or accountant working this figure out for you, but you should still have a copy of the Form 1040. If you look down this form, you should be able to identify the AGI reference. This is the figure you should use when deciding whether you are eligible to open a Roth IRA account or not.
Currently, for 2009, you are eligible to open a Roth IRA account and make full contributions if your income is up to $101,000. If you're earning up to $160,000 then you will be able to make reduced contributions. If you are making a joint application with your married partner then the joint AGI should be under $159,000 for full contributions, and under $176,000 for reduced contributions.
To give you some idea of how these figures have changed slightly, in 2008 a single AGI eligibility had a cap of $105,000 and married was capped at $159,000, which suggests an annual increase of about $4,000 to $6,000.
As far as Roth IRA limits are concerned, it isn't just the income which is taken into account. Regardless of how much you earn and whether you fall within the category that permits you to make full contributions or partial contributions (phase out), you also have to be aware that there are limits imposed on the contributions you can make within each tax year.
There are a number of factors which can affect the exact amount which you are eligible to contribute towards your account, and as far as Roth IRA limits are concerned, if you've qualified on the basis if income, the you need only understand the limits which will affect you as far as your annual contribution limits are concerned.