Roth IRA Rules

As long as you are determined to save enough money and prepare for your retirement, you have nothing to worry about since there are several retirement investing plans that you can choose from. One of the best accounts today is the Roth Individual Retirement Accounts that come with pretty straightforward Roth IRA rules. You just need to learn about the policies concerning eligibility, contributions, conversions, and distributions.

Retirement and Roth IRAs

First and foremost, you need to become aware of what the Roth IRA exactly is, before you break down all of the rules by category. A Roth account is one of the most popular types of Individual Retirement Accounts. SIMPLE IRAs and traditional IRAs are other known types that furnish slightly different benefits or target different groups, but in reality they all serve the purpose of saving for retirement.

Because all of the retirement accounts present both long-term and short-term tax implications, the IRS or Internal Revenue Service has created some policies to guarantee that exploitation and misuse of retirement plans will not occur. Later on, you’ll learn that some of the Roth IRA rules are made to protect the contributors, while others are established to protect the government.

Eligibility Rules

In actual fact, the eligibility regulations are plain and simple – anyone, regardless of age can make contributions to a Roth IRA. To be qualified as a contributor, you must prove a taxable compensation. This includes bonuses, salaries, tips, wages, fees and any other amount you are recompensed for because of any type of service to others. Even though you fit the requirements to make contributions to a Roth IRA there are predetermined limits to these contributions, which lead to the next set of rules.

Compensation Rules

As stated above, to become eligible to place funds in this account in a given calendar year you are required to show some form of earning, which comes with an income limit on contributions. If your AGI or adjusted gross income surpasses the set limits, then you will no longer be allowed to become a Roth IRA contributor.

Catch-Up Contributions

To aid people who are 50 years and older, the IRA established a subset of contribution policies that are applicable only to contributors who are 50 years and older at the end of the year. These are termed as “catch-up contributions”.

Transfer Policies

This Roth IRA regulation pertains to transfers, which are at times called as an IRA rollover. You can convert your SIMPLE or traditional IRA to a Roth account in the following ways:

  1. Rollover – This process involves withdrawing money from a traditional IRA and transferring it to a Roth IRA within sixty days of obtaining the withdrawn amount.
  2. Account-to-Account – You can consult your traditional IRA custodian or trustee to move your funds to another financial institution that is handling your Roth IRA.
  3. Same-Trustee – This is switching a traditional IRA to a Roth IRA account with the same company or just simply re-designating your retirement plan as a Roth IRA.

Withdrawal Rules

A qualified withdrawal as per the Roth IRA rules should take place after five years of contributing to the account and the contributor must be 59.5 years of age.

  • Athena

    You are wrong on the withdrawal rules. You cannot withdraw your transferred amount until it has been in the Roth for 5 years – not the account opened for 5 years as it is with regular Roth contributions. If you do, you get hit with the early withdrawal penalty of 10%

  • Pat

    Is there restriction on the holdings in a Roth, for instance REITs or MLPs.Also I plan on taking out the interest each month, obviously it has not been in the acct for 5 years is it subject to tax or penalty

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The information provided on this website does not constitute professional financial advice. We do our best to maintain current & accurate information, but some information may have changed since it was published. Please consult your tax or legal advisor(s) for questions & advice concerning your personal financial situation.
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