How Being Knowledgable Of The Requirements Will Assist Increasing Your Roth IRA Potential

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Among the many preparations needed for retirement and estate planning, retirement savings provide a fantastic tax shelter. However you need to understand Roth IRA rules and other contribution requirements to maximize those tax savings.

Essentially, contributions to a retirement savings plan are made on a pretax basis - employers match employee contributions to a plan, but that “income” isn’t taxable until it’s received, once the employee has retired.

With a Roth IRA, the contributions you make aren’t tax deductible, however the withdrawals that you make in the future won’t be taxed - making it a great option for those who expect to have higher incomes in their retirement.

To learn more about Roth IRA and traditional IRA rules, read on for information that can help you amp up your savings and earnings.

Roth IRA Limitations

Roth IRA contributions are limited at $5000 per tax year. However, if you’re 51 or over, you can contribute up to $6000 to a Roth IRA. In 2009, those contribution limitations are expected to increase based on current inflation rates. They will go up in $500 increments.

Unfortunately, there are income eligibility requirements for a Roth IRA. Essentially, you can only make the maximum contribution if your Modified Adjusted Gross Income (MAGI) falls below a certain level. For example, a married couple may earn between $150,000 and $160,000 or lower and a single person can earn between $95,000 and $110,000 or lower. Otherwise, they must opt for a 401(k).

The 401(k) Roth Plan

Employees can now opt to make some of their elective retirement contributions Roth contributions. Historically, any deferred salary or 401(k) contributions were deducted from your taxable wages. However, any contributions considered Roth contributions to a 401(k) Roth are now included in a person’s taxable wages, though they may be free from federal income taxation.

Roth 401(k) plans are typically more advantageous for individuals with high incomes than a standard Roth IRA account. There are no AGI (amount of your income that’s taxable) limitations, and the contribution limit is significantly higher (currently sits just over $15,000 - and if you’re over 50, that increases to $20,000). The return on investment is also potentially significantly higher.

Switching from a Traditional to a Roth IRA

To make the conversion from a traditional IRA to a Roth IRA, you must have an AGI (Adjusted Gross Income) of less than $100,000. If you are married but filing separate forms, case conversions are typically not allowed. And though the amount converted is considered taxable income, any future growth will be tax-free. Another benefit? There are no minimum distribution requirements at age 70.

There is good news for those who are lamenting the AGI restrictions on Roth IRA conversions. New Roth IRA rules stipulate that after the year 2010, the AGI limit on Roth conversions will be eliminated. In addition, any payable taxes owed from conversions in 2010 can be paid in two installments over the course of two years.