Roth IRA Laws, Limits, and Eligibility

by RJ

in Investing

When I explain to anyone older than me that I want to be a financial planner for those in their teens and 20′s, I get a common response, “I wish I had started investing at that age.”

Today, the Internet makes it easy for anyone to start. In under an hour, you can have an online account set up. You don’t even need that much money. You can invest in a no-load mutual funMoneyd for as little as $50 a month.

The only excuse for not starting a Roth IRA  probably is that you still have a few questions. I can understand I was in the same place. Therefore, Part 3 of the series will cover common questions, laws, and limits about the Roth IRA.

Roth IRA Maximum Contribution For 2009

In 2009, an individual can contribute up to $5,000 for a Roth IRA.  If you’re over 50 reading a blog about investing for someone about half your age, congratulations, you may contribute $6,000 a year.

The maximum contribution for an IRA adjusts each year to match inflation.

Roth IRA Eligibility For 2009

In Part 1 of the IRA Series, I explained the requirements you must meet to contribute to a Roth IRA.

The guidelines are simple for some, but what happens if you’re not sure what your income will be at the end of the year? Personally, there is a wide range of what my wife and mine MAGI could be at the end of 2009. As of right now, we don’t think we’re going to reach the limit of $176,000 for couples filing jointly. However, we’re exploring different sources of passive income and my salary from my job fluctuates. What happens if we get very lucky and reach the limits? Would we be penalized for making contributions throughout the year?

Luckily, the lawmakers understand that there are many people with this same dilemma. I will cover this in more detail in a later post, but I want to get the point across that you’re not penalized. You’re permitted to do what’s known as a recharacterization to avoid any penalties. If you were to recharacterizate your Roth IRA, what you’re doing is switching your contributions you made  from a Roth IRA to a Traditional IRA penatly free.

If your salary is over the current year limits, you’re not allowed to contribute to a Roth IRA. If your salary is over the limits in a Traditional IRA, you can still contribute, you just can’t deduct your contributions. Since you’re always allowed to contribute to at least one type of IRA, you can always avoid a penalty if you were to exceed the MAGI limits.

There is a second option, which is a little easier…

Roth IRA Contribution Deadline

For 2009, you may contribute towards your Roth IRA starting on Jan. 1, 2009; up to the day you file your taxes for 2009 or no later than April 15, 2010.

If you filed for an extension you’re not allowed to go back to a previous year if it’s past April 15.

For those of you who may reach the income limits and don’t want to deal with the hassle of a recharacterization, you may always wait till after you know your exact MAGI. For example, in 2009 you waited to contribute to a Roth IRA because you were afraid of being over the limits. Finally, on March 1, 2010 you have all the documents to calculate your MAGI, which qualifies you for a full contribution. You then go ahead and make a maximum contribution of $5,000 to your Roth IRA towards 2009 limits.

Final Advice on Roth IRAs – Do It Now

As young adults, we only have a small window to build wealth through the stock market. If you wait till your 30′s to start investing, you will only be chasing your tail. However, since the contribution limits are restricted, there is no thing as catching up.

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