Roth IRA Qualifications

You would be hard pressed to find anyone that does not absolutely love the idea behind Roth IRAs. The tax benefits and flexibility are simply too good to pass up. Of course, most people are not aware that there are various Roth IRA qualifications that must be satisfied before an investor can fully utilize this amazing investment vehicle.

Similar to other tax breaks and credits provided by the federal government, not everyone is allowed to participate in Roth IRAs. There are various criteria that each individual, or family, must carefully consider or the IRS may actually disallow the benefits afforded by these individual retirement accounts. These criteria involve basic basic concepts:

The Amount of Money You Earn
The Amount of Money You Make
Where You Invest Your Money
When You Invest Your Money

Earned Income Determinations

The earned income requirement is simply a way to prevent wealthy families, that do not participate in the work force, from investing in a Roth IRA. This requirement basically states that in order to invest in this type of tax-favored retirement account, the investor must have actually earned enough income to cover the amount that they want to contribute.

Earned income typically includes any salaries, wages, or fees that you actively earn. This would also include such items as commissions and tips. Interest, dividends, capital gains, social security payments, and pension income is not counted as earned income and cannot be used towards any Roth IRA investments.

Roth IRA Income Limits

Furthermore, the amount of money you make is also a crucial element when analyzing the various Roth IRA qualifications. While the IRS wants the investor to earn some money, they simply do not want them to earn too much. As such, in order to participate in a Roth IRA your modified adjusted gross income (MAGI) cannot exceed certain thresholds. At the date of this publication, the limitations are as follows:

Income Levels for Roth IRA

If your filing status is single, head of household, or married filing separately, your MAGI cannot exceed $120,000
If your filing status is married filing jointly, your MAGI cannot exceed $176,000
If you are married and live together, yet file a separate tax return, your MAGI cannot exceed $10,000

If you are uncertain as to how you file, check last years 1040. This will provide you the information you need.

Approved Financial Institution

In addition to satisfying the aforementioned criteria, Roth IRA eligibility rules dictate where you can open your account. Each IRA can only be opened at an IRA approved financial institution. This would include most banks, credit unions, and brokerage firms. Always check the institutions eligibility before depositing any of your money.

Roth IRA Contribution Deadline

Finally, if you satisfy all of the Roth IRA qualifications above, you are limited to the amount in which you can contribute each year. Currently, if you are under the age of 50, you can contribute up to $5,000 per year. If you are past the age of 50, there is a small catch-up provision that will allow you to contribute an additional $1,000 per year; for a maximum of $6,000.

As with all investment decisions, you should always contact your financial planner, or CPA, to help you wade through all the ever-changing Roth IRA qualifications.