The popularity of the Roth IRA is undisputed. Unfortunately, certain people are precluded from using one.
A Roth IRA is a very good idea for the person who anticipates making a lot of income later in their life and wants to shelter as much of this income from taxation as possible. Unlike a Traditional IRA, there is no tax deduction for contributions made to a Roth IRA. The earnings of the account are generally exempt from tax when they are withdrawn from the account after the age of 59 and a half. The Traditional IRA is useful when a person is anticipating that his tax rate after retirement will be low. The tax is deferred at the time it is deposited into the account and paid after retirement at the lower rate. The Roth IRA takes the opposite approach.
However, there are limits on who exactly can open a Roth. The Internal Revenue Service establishes the eligibility requirements for IRAs. This is because Individual Retirement Accounts are so concerned with tax issues. The IRS has set limits on the maximum amount of income that can be made before a person is no longer allowed to use a Roth IRA.
The Roth IRA limits work on Modified Adjusted Gross Income (MAGI). The limit in 2007 is $99,000 for a single taxpayer to be allowed to make the full contribution. If the income is between $99,000 and $114,000, the maximum contribution allowed is gradually phased down. If the MAGI is above $114,000, no contribution is allowed at all. For married taxpayers who file jointly, the limit is $156,000 for full contributions and phases down up to $166,000. Married taxpayers who file separately are only allowed small contributions.
The Roth IRA income caps only limit the amount of contributions that can be made to an account. They do not limit the right to maintain an already existing account. Once an account has been established and your income rises above the limit, you can still keep the account open and enjoy the tax benefits on earnings. You just can no longer make new contributions.
Every form of IRA has certain sets of rules and regulations that are established by law. These rules are often extremely complicated which should be no surprise to anyone familiar with the Internal Revenue Service. It is necessary to understand the limitations and advantages of each one when making a good financial planning decision. If you are within the caps for a Roth IRA, it is certainly among the wise options available.
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