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Named after Senator Roth of Delaware, the Roth IRA is a tax-free retirement investment account everyone should consider if they are eligible. While the contributions to a Roth IRA are not tax deductible (a negative), the gains will not be taxed on distribution when you retire (a positive). This allows the investor to diversify his or her tax exposure because most retirement accounts (most IRAs, 401k’s, 403b’s) work the other way, contributions are tax deductible but the distributions are taxed in retirement. If you believe your tax rate will be higher when you retire, the Roth IRA is for you; if you believe it will be lower, the other options are for you. Since you likely don’t know, given the uncertain nature of the tax environment, using both allows you to hedge your bets.
Your contribution is limited to $4,000 in 2007, $5,000 in 2008 (+$500 increments thereafter based on inflation) or the amount of income you earned that year. Those 50 and over can contribute an additional $1000. If you earn over the income phaseouts, which in 2007 start at $95k for single filers, then your contribution is also limited based on the phaseout rules.
There you go, a two minute primer on Roth IRAs!
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Rules
How much can you contribute each year to your Roth IRA? That depends on how much income you’ve earned that year, if you are below the annual contribution limit then your maximum contribution amount is your earned income. If your annual earned income is above the contribution limit, explained below, then the limit is specified by law to be $4000 in 2007 and $5000 in 2008.
Here are the contribution limits for 2007 and beyond:
| Year |
Contribution Limit |
| 2006-2007 |
$4,000 |
| 2008+ |
$5,000 |
After 2008, the contribution limits will increase in $500 increments in line with inflation.
In addition to the base contribution limit, there is a catch-up contribution provision of $1,000 if you are 50 and over.
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Rules
Did you know that not everyone can contribute to a Roth IRA? Yep, that’s right, not only do you need to earn income, you can’t earn too much! For a single filer, if your adjusted gross income is between $95,000 and $110,000 then you can’t contribute the full $4000, your maximum contribution is some amount less than that.
Contribution Limits
| Filing Status |
Floor |
Ceiling |
| Single |
$95,000 |
$110,000 |
| Married Filing Jointly |
$150,000 |
$160,000 |
| Married Filing Separately, Living Apart |
$95,000 |
$110,000 |
| Married Filing Separately, Other |
$0 |
$10,000 |
How much you can contribute is linearly related to that phaseout range. For example, if you are Married Filing Jointly and earn $155,000, you are permitted 50% of the Roth IRA contribution, or $2,000 annually.
There are two special rules. The first is that the increments are in units of $10, rounding up at all times. A limit of $1201 means you can contribute up to $1210 each year. The second rule is that the minimum contribution, above $0, is $200. So if you calculate that you can only contribute $100 each year, you actually can raise that to $200.
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We at Roth IRA Explained want to be a helpful and informative resource for novice and seasoned investors looking to understand all the basics of Roth IRAs, all the nuances of Roth IRAs, and all the complicated aspects of Roth IRAs - all the things that you probably wanted to know but simply couldn’t glean by reading other more complicated sites out there. I’m a regular person like you, I am not an expert investor, I’m not a tax expert, and I am not a lawyer. The things that I write may be incorrect, I might misinterpret some things, but rest assured if and when I find any errors, I seek to correct as quickly as possible.
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