How Much Can I Put in My Roth IRA?

The Roth IRA contribution limit for 2009 is set at $5,000. For those 50 years plus it is $6,000. There are other rules and stipulation covering this plan. The following is a basic guideline.

Before Making Contributions

Assessing your tax returns is necessary prior to making any payments. For the tax year you must have taxable compensation. Furthermore your modified AGI (Adjusted Gross Income) needs to be within limits. If you aren’t sure of your status, consult your financial adviser or a tax expert.

Benefits

There are other IRA programs like SIMPLE and Traditional IRA. Almost all of them have tax deductible contributions. The Roth IRA contribution cannot be deducted. While a disadvantage, it has more benefits in the long run.

The biggest one is that distributions aren’t subject to tax. While not deductible, the contributions can lead to lower taxes. Depending on the situation, it can result in tax credits as well. You also don’t have to worry about your investments being taxed; they are exempt. The exemption also covers any beneficiaries of the funds.

You can also withdraw the principle invested (not the converted funds) without incurring penalties. With 401k and other plans, withdrawing early results in a 10% tax.

Roth IRA Contribution Rules

The $5,000 limit is set for those below 50 years of age. If you are over it, you can put in $6,000. For 2010, it will be indexed to inflation. Since 2008, those above 50 can put $6,000. Starting 2010, the limits will also be indexed to inflation.

You do not need to make the $5,000 deposit at once. You can make monthly deposits until it reaches the maximum limit of $5,000 or $6,000. You also need to realize you cannot deposit more than the allowed amount.

For example, John puts in $3,000 for 2008. He can’t deposit $7,000 in 2009 to make up for the $2,000 he didn’t deposit in 2008. The system is a use or lose it type. For the best benefits, the Roth IRA contribution needs to be at maximum every year.

Contributing to Other IRA

The AGI isn’t the only factor that will affect your contribution. Depositing in the Traditional IRA can reduce the amount. This isn’t always the case. You should check if it applies to your case. An employer sponsored retirement plan won’t have an effect on Roth IRA. This includes SIMPLE IRA and SEP IRA.

Withdrawing and Other Rules

You can withdraw the funds when you reach 59 ½ years of age. The accumulated amount has no tax penalties. If your earnings are over $116,000 you are not eligible to contribute. For joint filing the limit is $169,000.

You can make reduced deposits if your AGI is between $101,000 and $116,000. For joint filing, the AGI is between $159,000 and $169,000. These levels are subject to change, so consult your adviser first.

The amount of Roth IRA contribution you make can result in savings in the long run. By reviewing all your options, you can make the most of your opportunity.

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