Roth IRA Eligibility
Since its introduction under the Taxpayer Relief Act of 1997, the Roth IRA has become a popular retirement and also estate-planning tool among U.S. taxpayers. According to a study done by the Investment Company Institute, the Roth IRA assets increased to $215 (estimated) billion as of December 2009. However, there are many individuals are prevented from participating in the Roth IRA because of the stringent qualification requirements. Her are some of these requirements and explore some qualification opportunities that may be available to certain individuals.
Moreover, a Roth IRA may be funded through regular IRA contributions and assets converted from Traditional, SEP, or SIMPLE IRAs, as well as qualified, 403(b) or governmental 457 plans. To make regular IRA contributions, every individual must have eligible compensation for the year and must meet the following requirements :
First, the single filers, in 2010, if an individual’s tax-filing status is ‘single’, his or her modified adjusted gross income (MAGI) must not exceed $120,000. Then, an individual filing single may contribute up to $5,000 + catch-up for 2010 if his or her MAGI are less than $105,000. So, for individuals whose MAGI is between $105,000 and $120,000, the contribution limit is ‘phased out’. This means a special formula must be used to determine the dollar amount that such individuals should contribute to the Roth IRA for the year.
Second, in 2010, if an individual’s tax-filing status is married filing jointly, Roth IRA contributions are not allowed if the combined MAGI of both spouses exceed $177,000 and each spouse may contribute up to $5,000+ catch-up if their combined MAGI is not more than $167,000. If the couple’s MAGI is between $167,000 and $177,000, then the contribution limit is phased out.
Third, in 2010, if an individual’s tax-filing status is married filing separately, his or her MAGI must not exceed $10,000. If his or her MAGI is between $0 and $10,000, the contribution limit is phased out. If you fall within the phase-out range, you can still find it in your best interests to seize the opportunity to fund the Roth IRA. In most cases, the analysis shows that the benefit of funding the Roth IRA at any allowable amount outweighs the benefits of funding a Traditional IRA.
Maintaining one Roth IRA for all conversions and contributions instead of multiple Roth IRAs will help reduce administrative and trade-related expenses. However, if you suspect that you may not be eligible to make the necessary type of transaction, either a conversion or contribution, in a particular year, before putting the assets into one existing Roth IRA, you can maintain the assets in a separate Roth IRA until the eligibility is determined. Then, should you find that you are ineligible for the contribution or conversion, maintaining separate Roth IRAs will help eliminate the complex process of determining the net income attributable to the amount that needs to be recharacterized. During the last quarter of the tax year, when you, like many others, finalize your financial plans for the current year and explore opportunities for the upcoming year, you may want to revisit the eligibility rules for the Roth IRA as well as both features and benefits.
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