Who Can Open a Roth IRA?

With the passage of the Taxpayer Relief Act in 1997 Roth IRAs were written into law. The savings rate for Americans had dropped from 8 percent in 1980 to zero in 1998. The Roth IRA was created to offer tax incentives to people saving for retirement. There are no age restrictions on who can contribute to a Roth IRA but you must have taxable income for the year that you make a contribution.

Contribution Limits

The contribution limit is a total limit on traditional IRA and Roth IRA contributions. For example, if the contribution limit is $5,000 and you contribute $2,000 to a Roth IRA, you may only contribute $3,000 to a traditional IRA.

The contribution limit is adjusted annually depending on inflation. For 2009, individuals under 50 could contribute up to $5,000 and those 50 and older could contribute $6,000 as long as their adjusted gross income was at least that much. If your adjusted gross income is less than the contribution limits, your adjusted gross income is the maximum contribution you can make. These limits are per person so if you are married, each person can contribute the full amount to his or her IRA. For example, if you and your spouse are both 34 years old, you can each contribute $5,000 to your individual IRAs.

Single and Head of Household Eligibility

Roth IRAs are only available to people who make less than a certain amount each year. This limitation is based on your filing status. For 2009, if you were single or head of household and your income was below $105,000, you could open a Roth IRA and make the full contribution. If you are single or head of household and make between $105,000 and $120,000, you can open a Roth IRA but the amount you can contribute is decreased. If your filing status is single or head of household and you make more than $120,000 you cannot open a Roth IRA.

Married Couples Eligibility

Married couples have the option either to file a joint return for both people or to file two separate returns. If you file a joint return with your spouse you can earn up to $166,000 and open a Roth IRA and make the full contribution. If you make between $166,000 and $176,000 you can still open a Roth IRA but your contributions will be reduced. If your income exceeds $176,000, you cannot open a Roth IRA.
If you are married but file separate returns, you cannot make a full contribution to a Roth IRA. As someone with the filing status "married filing separately", if the income on your return is between $0 and $10,000, you can open a Roth IRA but your contributions will be limited. This is to prevent couples where one person earns so much that he or she who would make the couple ineligible for a Roth IRA from filing separate returns so that the other partner could still contribute to a Roth IRA.

Calculating Partial Contributions

If your income falls within the partial contribution range you can determine your maximum contribution with the following formula, where SC is the standard contribution limit, I is your modified adjusted gross income, U is the upper limit of the partial contribution range and L is the lower limit of the partial contribution range:

Maximum Contribution = SC * (U - I) / (U - L)

For example, if you were single and had an adjusted gross income of $114,000, you would still be able to open and contribute to a Roth IRA, but the contributions would be limited to $2,000.

Tax Advantages

Unlike a traditional IRA, contributions to a Roth IRA are not deductible from your income in the year that they are contributed. Contributing money to a Roth IRA allows the money to grow tax free until retirement. At retirement, the money and any earnings are withdrawn tax free as well. For those who are able to chose between a Roth IRA and a traditional IRA, the Roth is usually the better option for people who are in a lower tax bracket now than they expect to be in at retirement. A traditional IRA is a better idea for people who expect to be in a lower tax bracket at retirement than they are now.

Penalties

In order to prevent people from abusing Roth IRAs and using them for purposes other than saving for retirement, the government imposes an additional penalty on withdrawals before age 59 1/2. When considering whether you should open a Roth IRA, determine whether you will need the funds before retirement. If you have high interest debt, like credit cards, it is usually better to pay those off and start a small emergency fund for yourself before putting aside money for a Roth IRA.

References

• Roth IRA Rules
• Roth IRA History
• Bankrate.com Roth IRA Info