Saving money for retirement is a great idea. When it comes to retirement plans, one of the options you have is to start an IRA or Individual Retirement Account. If you have decided to start an IRA, you first have to understand some IRA basics. You have to understand that IRA isn’t the investment itself but rather a retirement account that holds your investments. There are basically three types of IRA namely the traditional IRA, Roth IRA and SIMPLE IRA. You have to decide which type of IRA is most suitable for you. If you have decided to start Roth IRA, then you have to know about the Roth IRA rules.
How do you start Roth IRA? Starting Roth IRA isn’t that difficult. If you are eligible for Roth IRA, you just have to find the right IRA provider for you. To be eligible for Roth IRA, all you need is a taxable compensation which includes salaries, bonuses, wages, tips, fees and other forms of income you may have received by providing services. There is no age restriction so anyone can make contributions to Roth IRA regardless of age. When it comes to contributions, there are also IRA contribution rules that govern Roth IRA.
Rules Governing Roth IRA
There are two forms of contributions involved in Roth IRA. Aside from the allowable contribution, there is also the catch-up contribution. If you are 50 years or older in the calendar year, then you are allowed to make a catch-up contribution. The standard contribution limit for the year 2010 is $5000 while the catch-up contribution limit is $1,000.
For the coming year 2011, the same contribution limits will apply. If you add the two, you will have a total contribution of $6000. In the year 2012, these contribution limits are expected to increase with an index of inflation.
Roth IRA Limits
When it comes to Roth IRA limits, you also have to know about Roth IRA income limitations. It is important that you know about the limits because if your adjusted gross income or AGI exceeds these limits, you will not be able to make a full contribution to your Roth IRA or you may not be allowed to make contributions at all. For single filers, head of household and those Married Filing separately (not living with the spouse during the year), the income limit is $105,000. If their AGI is more that this amount, you cannot make a full contribution to your Roth IRA. If it exceeds $120,000, you won’t be able to make contributions. For joint filers, the income limit is $167,000. They cannot make full contributions if they exceed this amount and if their AGI is more than $177,000, they are not eligible to make contributions. If you are married and filing separately but you are living with your spouse, the income limit is $10,000. These Roth IRA income limits based on AGI are for the year 2010.
If in case you would need to access your account, you also have to know about IRA withdrawal rules for Roth IRA. You are allowed to make withdrawals from Roth IRA five years after making contributions to your Roth IRA and when you are 59 ½ years of age. If you need to withdraw from your IRA before this time, it may be subjected to a 10% early withdrawal penalty.