If you are eligible to contribute to a Roth IRA then it is a no brainer, contribute!
Why? Tax free income and you can withdrawl funds prior to retirement (only original contributions, not gains). Think of the option to access funds as a savings account, should you not take funds then it will grow with your retirement savings. Remember that the account, depending on the particular investment within your Roth IRA, may lose value.
Roth IRA MAGI Limits 2011
- $169,000 for individuals who are married and file a joint tax return
- $10,000 for individuals who are married, lived with their spouses at anytime during the year, and file a separate tax return
- $107,000 for individuals who file as single, head of household, or married filing separately and did not live with their spouses at any time during the year
Establishing a Roth IRA
A Roth IRA must be established with an institution that has received IRS approval to offer IRAs. These include banks, brokerage companies, federally insured credit unions and saving & loan associations.
A Roth IRA can be established at any time. However, contributions for a tax year must be made by the IRA owner’s tax-filing deadline, which is generally April 15 of the following year. Tax-filing extensions do not apply.
Compensation Defined
For individuals working for an employer, compensation that is eligible to fund a Roth IRA includes wages, salaries, commissions, bonuses and other amounts paid to the individual for services the individual performs for an employer. At a high level, eligible compensation is any amount shown in Box 1 of the individual’s Form W-2.
For a self-employed individual or a partner in a partnership, compensation is the individual’s net from his or her business, less any deduction allowed for contributions made to retirement plans on the individual’s behalf, and further reduced by 50% of the individual’s self-employment taxes.
Other compensation eligible for the purposes of making a participant contribution to a Roth IRA includes taxable amounts received by the individual as a result of a divorce decree.
Ineligible Compensation
The following sources of income are not eligible compensation for the purposes of making contributions to a Roth IRA:
- rental income or other profits from property maintenance
- interest and dividends
- other amounts generally excluded from taxable income
Income Limits
Individuals whose MAGI falls within a certain range may not be able to contribute the full contribution limit. These individuals must use a formula to determine the maximum amount they may contribute to a Roth IRA.
Here is a chart outlining the ranges for each tax-filing category:
| Filing Status | Income Range for 2010 | Income Range for 2011 |
| Married, filing a joint tax return. | At least $167,000 but less than $177,000. | At least $169,000 but less than $179,000. |
| Married, filing a separate tax return and lived with spouse at any time during the year. | More than zero but less than $10,000 | More than zero but less than $10,000 |
| Single, head of household or married filing separately without living with spouse at any time during the year. | At least $105,000 but less than $120,000 | At least $107,000 but less than $122,000 |
An individual who earns less than the ranges shown for his or her appropriate category can contribute up to 100% of his or her compensation or the contribution limit, whichever is less.
Those who fall within the ranges must use the following step-by-step formula to determine the amount they may contribute:
- Step 1 - Subtract the lowest dollar amount in the range from MAGI
- Step 2 - Divide the result in Step 1 by the difference between the lowest amount in the range and the highest amount in the range
- Step 3 - Multiply the result from Step 2 by the maximum contribution limit
- Step 4 - Subtract the result in Step 3 from the maximum contribution limit. The result is the amount the individual is allowed to contribute to a Roth IRA.
