Who Qualifies for a Roth IRA?
In 1997 the Taxpayer Relief Act introduced a new type of retirement savings account that would provide new incentives for individuals to save called a Roth IRA. The Roth IRA allows individuals to make contributions to an account where the money can grow tax free until retirement when it can be withdrawn, also tax free.
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Income Qualifications
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In order to qualify for a Roth IRA, your taxable income and modified adjusted gross income must be below a specified level depending on your filing status. For 2009, singles and heads of household could not make more than $116,000, those who were married filing separately could not make more than $10,000 and those who were married and filed a joint return could not make more than $169,000.
Calculating Modified Adjusted Gross Income
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According to the IRS, to calculate your modified adjusted gross income is your adjusted gross income minus any Roth conversions, rollovers or minimum required distributions. Then add any deductions that you took for contributions to traditional IRAs, student loan interest you paid, tuition and fees and domestic production activities. Also add foreign income or housing exclusions, qualified bond interest, and adoption benefits that you received from your employer.
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Contribution Limits
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The contribution limits apply to all IRA accounts whether they are traditional IRAs or Roth IRAs. For 2009, you could contribute $5,000 per person if you were less than 50 years old and $6,000 if you were over 50 years old. However, if your filing status was head of household or single and made between $101,000 and $116,000, married filing jointly and made between $159,000 and $169,000, or married filing separately
and made less than $10,000, your contribution is subject reduced.
Reduced Contributions
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If your income falls within the phaseout range, your contributions are limited to less than the standard contribution limit. You can use the following formula to determine how much you can contribute to the Roth IRA where MI is your modified adjusted gross income, LL is the lower limit of the phaseout range and UL is the upper limit of the phaseout range.
Contribution = MI * (UL - MI) / (UL - LL)
For example, if you were a 24-year-old single person whose modified adjusted gross income was $113,000, your maximum contribution to a Roth IRA would be $1,000.
Why Chose a Roth IRA?
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The advantage that makes a Roth IRA different than a traditional IRA is that the contributions are not tax-deductible when they are made but money is withdrawn tax-free. This is advantageous for people who believe that they are in a lower tax bracket now than they will be in at retirement. If you believe you are in a higher tax bracket now than you will be in at retirement, you should consider a traditional IRA.
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