Roth IRA Characteristics
Roth IRAs were introduced in 1997 as a means to encourage Americans to save more for their retirements. Billions of dollars have flowed into these accounts ever since, and their popularity continues to rise. The basic characteristics of these accounts are fairly simple.
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Contributions
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For the past several years, the amount of money that can be contributed into a Roth IRA has increased. In 2010, taxpayers can contribute $5,000 to a Roth account. Those age 50 and older can contribute an additional $1,000 each year as a "catch up" contribution.
Income Threshold
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Taxpayers with modified adjusted gross incomes above a certain level are not eligible to open or contribute to Roth IRAs. In 2010, Roth contributions are phased out for married and qualifying widower filers if their incomes are between $167,000 and $177,000, or $105,000 to $120,000. Married taxpayers who file separately have a threshold of $0 to $10,000. Modified adjusted gross income is adjusted gross income (gross income minus the deductions listed on the first page of the 1040) with certain miscellaneous items added or subtracted, such as municipal bond interest.
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Taxation of Roth IRAs
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Unlike traditional IRAs, all Roth IRA contributions are nondeductible. They can only be made with after-tax money. However, all distributions from a Roth IRA are tax-free as long as the IRA owner has had a Roth IRA open for at least five years and is at least age 59 1/2. Early distributions are fully taxable as ordinary income and also assessed the standard 10 percent early withdrawal penalty.
Roth IRA Conversions
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Traditional IRAs and qualified plan balances can be converted into Roth IRAs without penalty, although the 10 percent early withdrawal penalty is waived. Before 2010, taxpayers could not convert any IRA balance that would raise their income past $100,000 in a given year. However, this restriction has been lifted in 2010, thus allowing taxpayers to convert balances of any amount into Roth IRAs.
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References
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