Roth IRAs have fast become a preferred way to save for a comfortable retirement. Their tax advantages allow for long-term investing gains to be kept tax-free, but there are limits for Roth IRAs. These limits broadly include two categories - one being compensation or income limits, which affect eligibility, while the other one is the limits that apply to contributions to a Roth IRA account.
The limitation on Roth IRA called income or compensation limit is for those who make too much money. These people may not be eligible to contribute to a Roth IRA. There is even an income threshold known as the phase-out limit where one can only give a reduced contribution. The income being talke of here is the adjusted gross income or AGI, and not the gross income.
The income or compensation eligibility limits for Roth IRAs for the year 2007 for a single contributor was up to $101,000 in case of full contribution while it was $101,001 to $116,000 in case of reduced contribution. For married couple filing jointly, the limits were up to $159,000 for full contribution and $159,001 to $169,000 for reduced contribution. On the other hand, the compensation eligibility limits for the year 2008 were up to $105,000 for full contribution and $105,001 to $120,000 for reduced contribution for a single contributor while for joint filings it were up to $166,000 for full and $166,001 to $176,000
for reduced contributions.
Federal government imposes annual contribution limits to different types of IRAs. Individuals are allowed to deposit only a limited amount of money into their IRA each year. Also, the deposits into the IRA is not necessarily to be made at the same time, but into small parts on regular intervals, typically monthly, and that should sum up to not more than the imposed contibution limits.
The amount of contribution limits on Roth IRAs depends upon age, and is different for those aged below 50 years and those 50 year old or more. Those who are aged 50 years or more are eligible to make an additional catch-up contribution along with the maximum contribution limit like those below the age of 50 years. For the year 2004, the annual contribution limit was $4000 while the catch up limit was $500. For the years 2005 and 2006, the annual contribution limit was $4000 while the catch up limit rose to $1000.For the years 2008 and 2009, contribution
and catch up limits were $5000 and $1000 respectively.
When it comes to redeem a Roth IRA, there are certain rules. A qualified distribution from a Roth IRA is free from inclusion in gross income for individual tax purposes. In simple words, a qualified redemption from a Roth IRA is tax-free. Roth IRAs are confined to a five year holding period where one needs to complete at least five years since the first contribution or conversion to the Roth IRA account to redeem the savings without any taxes. Nonqualified distributions are taxable to the extent the amount of the distributions, added to all prior distributions less prior amounts that were includible in income, exceed the direct Roth contributions.