Roth IRAs

Contribution Limit

The contribution limit for both 2009 and 2010 are the lesser of qualifying income or $5,000.  Qualifying income is defined as earned income reported on W-2, self-employment income or alimony; or Spouses qualifying income over and above amount considered for spouse’s IRA.  Individuals who are age 70½ or older by end of applicable tax year are not eligible.

The catch-up contribution limit, for individuals who are age 50 or will become age 50 at anytime within the tax year (even if you turn 50 on December 31) for both 2009 and 2010, is $1,000.

Who is eligible to contribute to a Roth IRA?

Individuals are eligible to contribute to a Roth IRA based if modified adjusted gross income falls within the limits shown in the chart below.  These are the 2009 limits:

Roth IRA Eligibility

For 2010, the married joint filer income limit increases to $167,000 up from $166,000.

Roth IRA Distributions

A withdrawal from a Roth IRA is deemed to be 1st in (“the basis”), 1st out.  This means that an individual can take tax-free withdrawals up to the principal amount of the contribution, “the basis.”  In addition, these withdrawals are not subject to the additional 10% penalty tax typically applicable on distributions prior to the attainment of age 59½.

Any gains on the after-tax Roth IRA contributions are subject to ordinary income tax and the additional 10% penalty tax on distributions prior to the attainment of age 59½.  However…  the withdrawal of gains are tax-free if the distribution “qualifies” by satisfying both the:

“5-year” rule - satisfied in the 5th year of a contribution to any Roth IRA; and

“Qualified purpose” rule - satisfied by attainment of age 59½, death, disability, or 1st time homebuyer

Required Minimum Distributions (RMDs)

RMDs are not required from Roth IRAs upon attainment of age 70½.  RMDs are required in year following death of nonspousal beneficiary in accordance with applicable rules.

Copyright © 2009 Barry R. Milberg   All Rights Reserved

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