Nearly everyone with any sort of retirement goals is looking for the best way to put money aside for the long term. One of the more popular options over the past few years has been the Roth IRA. Due to the easy access and favorable tax treatment, a large section of the American population has eligibility for the Roth IRA. Let’s take a look at the rules surrounding the Roth, discuss why it may be a good thing for you to think about using, and see who is eligible for a Roth.
The Two Types Of IRAs
There are two different IRAs (which stands for Individual Retirement Account): the Traditional IRA and the Roth IRA. Both accounts allow you to save money for retirement and both allow the money deposited in them to grow tax deferred, which means that you don’t have to pay taxes on the money in them from year to year the way you might if you just invested in the stock market.
Despite the tax deferral though, you do have to pay taxes on the money you invest in an IRA at some point and that is the main difference between the two IRA accounts. The deposits you put into a traditional IRA are done pre-tax, which essentially means that you get a tax deduction for the amount you put into a traditional IRA. If you put in $3,000 into a traditional IRA in 2009, then you’ll get a $3,000 deduction on your taxes when you file them in 2010. However, when you start to withdraw the money from your IRA, the earnings will be taxed at that point.
The Roth IRA handles taxes in just the opposite manner. The money that you put into the Roth is done post-tax, so the taxes have already been taken out. You don’t get a tax deduction for your contributions. But the bright side is that your withdrawals are tax free. When you hit retirement age and start pulling money out, you don’t have to pay any more taxes on that money.
Roth IRA Eligibility Requirements
The rules for eligibility are pretty simple and you don’t need any sort of Roth IRA eligibility calculator to figure out if you qualify or not. Not everyone qualifies for a Roth, but a lot of people do. Your eligibility for a Roth IRA hinges primarily on how much income you have. Single people who make less than $105,000 are eligible to contribute the full amount in 2009, and if they make more than $105,000 but less than $120,000 then they can contribute a partial amount. Married couples who make less than $166,000 can contribute the full amount and making between $166,000 and $176,000 will qualify them for a partial contribution.
Another qualification for eligibility is that you must have an income in order to contribute, and you cannot contribute more than your total income. So, for instance, a housewife with no taxable income would not be able to contribute to a Roth, even if her husband was eligible for one of his own. If that housewife had a part time job that paid her $2,000 a year, she would be able to contribute $2,000 to a Roth.
The Roth IRA eligibility for 2009 has not changed significantly from the rules in 2008. The contribution limit for both years was/is $5,000. After 2009 the limit will increase a certain amount to keep pace with inflation.
Why Should You Think About A Roth?
Generally, the best place to begin putting money away for retirement is going to be a 401k. You are able to contribute several thousand more than into an IRA, and your employer may match your contributions with some of his own. (If you leave your job and want to take your 401k with you, read our 401k rollover guide for information.) If you do not have an 401k available or are already putting the maximum allowed into one, then an IRA is the next best place to start saving additional retirement funds.
Unless you make a significantly high income and are looking for additional tax deductions now, I generally recommend going for a Roth IRA instead of a traditional IRA. The main reason I do this is that if you can go ahead and pay taxes on the money now, you are likely to save yourself some expenses over the long haul. The chances of taxes being lower in the future than they are now are slim, and you will also very likely be in a higher income tax bracket in any case, as most people’s income rises as they advance in their careers.
Whether you decide to go with a Roth or some other retirement vehicle, the important thing is to start saving now. The wonders of compounding interest will make you some serious money down the road, but you have to start putting money into your savings as soon as you can.