A Roth IRA is an individual retirement arrangement that is, for the most part, subject to traditional IRA rules. It may be considered an account or an annuity, but it must be designated as a Roth IRA at the time it is created. Unfortunately, one may not deduct contributions to a Roth IRA. However, if you follow the requirements outlined in Publication 590, certain qualified distributions will be tax free. Though this isn’t exactly the same as making a tax free contribution, it is still helpful and can save you money in the long run. Roth IRAs are not right for everyone, do some research and see if a tax deferred investment makes sense for your particular situation.
You can contribute to a Roth IRA if you have a modified adjusted gross income that is less than $176,000 for married filing jointly or for a qualified widow or widower, $120,000 for single, head of household, or married filing separately with the filing individual not living with his or her spouse at any time during the filing year, or $10,000 for married filing separately where the filing individual lived with his or her spouse at any time during the filing year. These rules must be followed carefully, as they do affect your ability to contribute to a Roth IRA.
There is a contribution limit for Roth IRAs, and it is dependent upon whether contributions are being made to both Roth IRAs and traditional IRAs or only to Roth IRAs. If you are only contributing to Roth IRAs, there is a contribution limit that is the lesser of $5,000 or $6,000 depending on your age, or taxable compensation. If you are contributing to both a Roth IRA and a traditional IRA, the contribution limit is the lesser of $5,000 or $6,000 depending on your age and subtracting all the other contributions of the year made to IRAs that are not Roth IRAs.
There is no one right answer about choosing a Traditional or a Roth IRA. Some people require both traditional IRAs and a Roth IRA to meet their financial and personal needs or goals. Research and careful financial planning are the key to picking the right solution for your set of circumstances.
This process is a bit complex, but plan to read through the information that the IRS provides so you can make an informed decision. If this proves too difficult, plan on speaking with a tax preparer for advice. Many public libraries and public organizations offer free help to individuals wishing to better understand tax matters. Seeking these types of opportunities for education out is vital to being a better informed taxpayer and making smarter tax related decisions.