A Quick Look At Roth IRA Contribution Rules

One good thing about the Roth IRA is that everybody can contribute to it, young and old alike. Here, are some of the basic ROTH IRA contribution rules.

1. First thing to consider is eligibility which has to do with age. An 80-year old individual can no longer contribute to a traditional IRA but he still can set up a Roth IRA. There is basically no age limit in Roth IRA contribution rules as long as you have a compensation income.

What is a compensation income for the purpose of Roth IRA contribution rules? Compensation income include salaries, wages, tips, bonuses, commissions as percentage to sales and other monetary benefits you received from your employer as part of your compensation. Alimonies are also covered.

But income from property investments, pension income and other non-taxable income are not compensation income as covered by Roth IRA contribution rules.

2. The second aspect of Roth IRA contribution rules is contribution limits. The amount you can contribute to a Roth IRA depends on the amount of your compensation. Either you may not have enough compensation to contribute or your Modified Adjusted Gross Income or MAGI is too big and breaches certain fixed levels set by the ROTH IRA contribution rules. Remember that the basic allowable limit for regular Roth IRA contributions is $4,000 and catch-up contributions of $5,000 for people age 50 years or older.

If an individual is receiving a compensation income of only $3,000 a year, then he can only contribute to the amount equal to his compensation income. Limits will only apply if the person earns an amount more than the maximum allowable Roth IRA contribution.

3. Another aspect of Roth IRA contribution rules is the income limit. The amount of Roth IRA contributions is governed by certain MAGI range. For individual filers, if your MAGI is at a range of $99,000 or below, contributions to the maximum amount is allowed.

If am individual filer has a MAGI at a range of $99,000-114,000 phased-out or reduction of allowable contributions will be applied. If your MAGI overshoot $114,000 then he is no longer eligible to contribute.

For joint filers, Roth IRA contribution rules allow full contributions for those couples with MAGI of up to $156,000 and phased-out contributions for those MAGI at a range of $156,000-$166,000. No contributions will be allowed for those with a MAGI beyond $166,000.

If you find yourselves contributing to a Roth IRA and found out later that your MAGI is way below the limit. IRS penalties will be assessed and you will have to pay for it. This can mean paying the 6% penalty tax imposed each year the excess remains uncorrected.

4. Roth Contribution rules specify some corrective actions, which includes withdrawing of excess contributions, also known as re-designating or re-characterizing your Roth IRA into a regular IRA. However in some instances you can only choose one corrective action.

Another aspect of Roth IRA contribution rules is that your maximum allowable contributions can also be reduced. These are contributions to regular IRA plans and contributions to 501(c) 18 plans.

However contributions to a 401k or 403b plan will not affect the amount of contributions you make, even if one of these plans is a Roth IRA since these are employer- sponsored plans and technically these contributions came from the company and not from you.

Being familiar with the various Roth IRA contribution rules will not only make sure you avoid the hassle of facing a government investigation when some rules have been ignored but it will also make sure you are not slapped with the penalties.

Ira Contribution