Roth IRA is a tax saving plan initiated by the US Congress under the Internal Revenue Code. Roth IRA differs from other retirement plans on the basis of its tax structure. The tax is structured in such a way that it can be managed in many different ways. However, Roth IRA rates are correlated with the investments an individual makes during the financial year. For optimum returns it is necessary to understand the rules and eligibility requirements.
Eligibility requirements
Roth IRA qualification is based on factors such as earned income, approved institution, contribution deadline, and income limits.
The net earned income is calculated on the basis of the earnings received from different sources such as salaries, wages, professional fees, commissions, and bonuses. Interest income, rents, other annuities, and social security payments cannot be considered for Roth IRA eligibility.
The income limits are calculated on the basis of Modified Adjusted Gross Income used in tax returns. For year 2009, a single individual qualifies if the earning is 120, 000 or above. In case of married couples, the amount is 176 000. Finally the income married couples who separately file tax returns in the tax year.
The account for receiving contributions should be contributed to the Roth IRA approved institutions. The opened account must remain with the same institution. The contributions can be made up to a maximum of 6000. The deadline for making contributions is April 15th.
Advantages
Contributions from Roth IRA can be withdrawn tax free after the seasoning period of five years, provided the condition of age is met. Withdrawals are also allowed to buy a house if the owner does not possess a house. Another plus point of Roth IRA is that the assets can be passed on to the immediate heirs. This is a potential method of accumulating tax free income. Roth IRA reduces the taxes on estates since tax has already been paid. However, there are some distinct disadvantages with Roth IRA. The contributions are not tax deductible and the eligibility limit phases out after a certain income level.