Roth IRA rules and eligibility requirements

There are very few eligibility restrictions with a Roth IRA, making it an appealing investment choice for those unsure of when or how they might need to use their

savings.  To be eligible, an investor must have at least $250 with which to open a Roth IRA. This can be any individual 18 years of age or older, who has income in the form of a salary or wages, alimony, or self-employment income.

Roth IRA plans have few rules

With other IRAs and retirement plans to be eligible an investor may have to work for a specific company for several years to gradually become vested in the company retirement plan. Since other retirement plans use pre-tax dollars, there are often great restrictions on the use of the funds, and they are heavily taxed if used even for important investments such as buying a home.  Not so with the Roth IRA.
 

Income is the predominate rule governing Roth IRA eligibility

 Income is basically the only eligibility requirement for a Roth IRA. Adjusted gross income for those investing through a Roth IRA cannot exceed $95,000 for the maximum contribution of $3,000. The contribution to a Roth IRA can be up to 100% of total income or a maximum of $3,000 in 2004 and $4,000 for 2005-2007, whichever is less.
 

Other Roth IRA rules for special situations

There are certain circumstances where your eligibility for Roth IRA contributions may fluctuate depending upon marital status, age, and other types of IRA plans held.

Qualifying rules for married couples

For married couples filing jointly that amount is $150,000. As adjusted gross income increases, the amount of eligible contributions goes down. A smaller contribution can still be made for individuals with adjusted gross incomes between $95,000 and $110,000. Once the adjusted gross income for a single person exceeds $110,000, no further contributions can be made.

For married couples with adjusted gross incomes between $150,000 and $160,000, partial contributions can also be made to the Roth IRA. Once that amount exceeds $160,000, no further contributions can be made. It does not matter if the income is from one spouse or both, since eligibility for married couples filing jointly takes into account total adjusted income.

Over 50 rules

Older individuals are eligible for higher contributions. Those age 50 or older, can contribute up to $3,500 in 2004, $4,500 in 2005, and $5,000 in 2006 and 2007. They must meet the same adjusted gross income limits as younger investors to be eligible.

Rollover conversions not included

These eligibility requirements are for new Roth IRA only and are different when converting an existing traditional IRA to a Roth IRA. As part of the Tax Payer’s Relief Act of 1998, any tax payer, married or single, with an adjusted gross income under $100,000 could convert 100 percent of the traditional IRA to a Roth IRA. The amount of money converted from a traditional IRA to a Roth IRA is considered taxable income for that year, but does not count toward the income eligibility requirement.

Managing Roth IRA and traditional IRA plan rules

Investors may be eligible for more than one type of IRA or investment retirement account. For example, a person with a company sponsored retirement account and an adjusted gross income of $45,000 can still contribute the maximum $3,000 to a deductible and non-deductible IRA as well as a Roth IRA. It is important to note that choosing different IRAs and retirement accounts in which to invest may be advantageous, but the total amount contributed to the Roth IRA and other IRAs combined cannot exceed the maximums.