Government Rules on the Roth IRA

A Roth IRA can lead to a comfortable retirement.

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A Roth individual retirement account can be an efficient way to set aside money for your future, if you qualify for this type of plan under the rules established by the Internal Revenue Service. If you are under the income limit and want to set up a Roth IRA, make certain you can afford to be without the money until you retire. The IRS imposes heavy penalties for taking your money out of a Roth IRA too soon.


The IRS has very specific rules regarding who can set up a Roth IRA. You can contribute up to $5,000 to your Roth IRA each year as of 2012, or $6,000 if you’re 50 or older. The contribution amount decreases when your annual adjusted gross income reaches $173,000, and you can’t contribute at all if your AGI hits $183,000. If you’re a single filer, including head of household or married filing separately, the limits are lower. For singles, contributions are reduced when your AGI reaches $110,000, and if your AGI reaches $125,000 you can’t contribute at all.


The IRS does not allow you to withdraw funds from your account any time you want. To make qualified withdrawals, which means you aren’t penalized for taking out the money, you must be at least 59-1/2 years old and your account must have been open for a minimum of five years. Once you meet both of these requirements, you won’t face any penalties for withdrawing funds. If you withdraw money too soon, you may have to pay taxes on some of it, and the IRS will hit you with a 10 percent penalty on everything you withdraw.


When you fund your Roth IRA, the money added is “after tax” money. This means you’ve already had to pay income tax on the money, so putting money into a Roth IRA isn’t a way to reduce your current tax burden. The big benefit of a Roth IRA comes when it’s time to withdraw your money; you do not have to pay any federal income tax on your Roth IRA withdrawals. It doesn’t matter what tax bracket you’re in at the time or how much of it is interest or other earnings, you won’t owe taxes on qualified withdrawals.


The IRS makes some exceptions to the age rule for qualified withdrawals. You can take money out of your Roth IRA, subject to some limits, without the 10 percent penalty if you’ve become disabled or if you’re buying your first home. You won’t have to pay taxes on any contributions you remove, but if you’re not yet 59-1/2, you can expect to pay income tax on any earnings you pull out of your account. You may wish to consult a tax professional for help in determining the amount you’ll be taxed for taking funds out before you retire.