Roth IRA & Rules on Opening Accounts

You'll enjoy tax-free Roth IRA retirement income if you qualify.

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A Roth individual retirement account is a retirement program that allows you to collect tax-free income when you retire. But you don’t get a tax deduction for Roth IRA contributions during your working years. Not everyone can open a Roth IRA. There are certain Internal Revenue Service qualifications you must meet to open a Roth account.

Must Earn Compensation

In order to open a Roth IRA, you must have taxable compensation earned from working for an employer or from self-employment. The earned compensation can be wages, salary, commissions, tips, professional fees or any other earned income. If your income is solely unearned income from sources such as rents, investments, interest or annuities, you can’t open a Roth IRA.

Custodian Needed

You must open your Roth IRA with a bank, brokerage, mutual fund, life insurance company or other financial institution approved by the IRS to act as an IRA custodian or trustee. You will make your contributions through the custodian. The custodian also will accept your rollover contributions from other Roth and traditional IRA accounts. There are no tax consequences if you roll over funds from another Roth account. But if you convert a traditional tax-deferred IRA to a Roth IRA you, not the IRA custodian, are responsible for paying income tax on the money in the year of conversion. The custodian will process distributions from your Roth account according to IRS distribution rules.

Income Ceiling

Technically, there is no specific income limit for opening a Roth IRA, but you can’t put any money into the Roth account if your adjusted gross income exceeds $183,000 if married filing jointly, or $125,000 if single. If you are married filing separately and your spouse didn’t live with you all year, you can’t put any money into a Roth if your income exceeds $125,000, but if you are married filing separately and your spouse lived with you at any time during the year, the income limit drops to just $10,000. Your Roth contributions each year are limited to $5,000.

No Age Limit

Unlike with a traditional tax-deferred IRA, you can open a Roth IRA at any age and you can leave money in a Roth IRA for as long as you live. There are no minimum distribution requirements with a Roth IRA because taxes on your contributions were paid in the year you made the contributions. You can open a Roth IRA even if you have a 401k plan with your employer. The 401k doesn’t affect your Roth contribution limits.