Taxes Made Simple

From my Investing Blog
Roth IRA Rules 2009
The biggest difference between a Traditional IRA and a Roth IRA is that you do not get a deduction for contributions to a Roth IRA. Instead, when you take money out of your Roth IRA, it will be tax free; even the earnings on your contributions come out free of tax.
    
However, as you’d expect, there are some rules that go along with investing via a Roth IRA. First, there are contribution limits. These are the same as for a Traditional IRA. That is, for 2009 you can contribute the lesser of:
  • $5,000 ($6,000 if you’re age 50 or over), or
  • The total of your taxable compensation for the year.

Also, your eligibility to contribute to a Roth IRA is reduced (and eventually eliminated) as your income increases:
  • For single taxpayers and taxpayers filing as head of household, the amount you can contribute to a Roth IRA begins to decrease as your Modified Adjusted Gross Income surpasses $105,000. Once your AGI hits $120,000, you can no longer contribute to a Roth IRA.
  • For married taxpayers filing jointly, the amount you can contribute to a Roth IRA begins to decrease as your Modified Adjusted Gross Income surpasses $166,000. Once your AGI hits $176,000, you can no longer contribute to a Roth IRA.


Note that the income limits are much higher for Roth IRAs than they are for Traditional IRAs.

Distributions from Roth IRAs are subject to a 10% additional tax unless they meet certain requirements (almost identical to the requirements for Traditional IRA distributions). The biggest difference is that in addition to the other requirements, the distribution must be made at least 5 years after the first contribution was made to your Roth IRA.

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