Roth IRA Contributions
Roth IRA contributions are one aspect of these retirement accounts that must be understood completely. There are certain rules and limits that affect the allowable contribution amounts and sources because a Roth IRA only takes after tax income. These retirement accounts are not ideal for high income earners or those who earn over $150,00 in most cases. Almost anyone can open a Roth IRA but this does not mean everyone will benefit from this account type.
The amount of Roth IRA contributions allowed in any given year will depend on a number of different factors. Age plays a role because once the account holder reaches the age of 50 years then catch up payments are allowed. Catch up payments are extra contributions which the IRS allows when retirement age is nearing. The allowable contribution amount for both the basic IRA contribution and any catch up payments are set to the rate of inflation and increase every year or two.
Another factor involved in determining the allowable amount of Roth IRA contributions will take into consideration the annual income of the account holder and filing status. The maximum contribution allowed can be made if the income for the year is below the maximum income for the full contribution amount. The maximum income level is determined by the filing status of the account holder, and couples filing jointly as well as those filing head of household will have a higher maximum income ceiling than single individuals or couples filing separately.
All of the funds used towards Roth IRA contributions must come from income that has already been taxed. An individual may not contribute more to this type of IRA than they declare in taxable earnings for the year. If the Roth IRA contribution limit for the year is $5,000 but the individual only has a taxable income of $2,400 then the maximum contribution for the year would be set at $2,400, because that is the annual taxable income of the individual.
A partial contribution to a Roth IRA is allowed if the income for the year in question is above the maximum limit for a full contribution but less than the cut off amount for partial contributions. In some cases the amount over the limit can be small and a Roth IRA may still be the best choice for tax free retirement funds. If the income is significantly higher than the maximum limit then using a Roth IRA may not be ideal and another type of retirement account may be a better option.
It is important that the rules and requirements regarding Roth IRA contributions are clearly known and understood before this type of account is opened. If careful thought is not given to all of the important factors involved this type of account may not be the best way to save for retirement. A Roth IRA does offer some advantages for individuals who have average incomes, but high earners may not benefit from this type of retirement account at all because no contributions can be made.
