Roth IRA Eligibility

Roth IRA eligibility requirements can help you decide whether this investment tool is right for you. In order to be eligible to contribute to an account, you must meet certain income requirements established by the Internal Revenue Service. When it comes to the kind of income you can contribute to your account through something like a Roth IRA rollover, only certain categories of income meet the requirements for Roth IRA eligibility. The IRS is the final authority on eligibility requirements and maximum contribution restrictions for each tax year.

If you meet eligibility requirements, a Roth IRA can be a valuable addition to your retirement planning strategy. Unlike contributions to a traditional IRA, contributions to a Roth are deducted from your post-tax income. As a result, you will pay no taxes on qualified deductions when you become eligible to collect distributions at the age of 59 1/2. For retirees who want to devote all of their savings to living expenses, medical costs, travel, leisure activities and other costs of retirement, this benefit makes the Roth IRA an attractive option.

Taxable Compensation Limits

To meet the Roth IRA eligibility standards established by the IRS, you must earn taxable compensation and your Modified Adjusted Gross Income, or MAGI, must not exceed specific limits. Your MAGI, which is often equal to or approximately the same as your gross income, includes your gross income plus certain deductions and earnings that may affect your eligibility to contribute to a retirement account.

Between 2011 and 2012, the MAGI limits for Roth IRA contributions increased. As of 2012, your MAGI must be less than $125,000 per year if you are filing as a single adult or as the head of your household. If you are married and filing separately, and you did not live with your spouse at all during 2012, the $125,000 limit also applies. [1]

If you are married and filing jointly, your Roth IRA eligibility limit increases. A married couple filing together cannot have a MAGI of $183,000 or more. If you are widowed and you meet specific eligibility requirements, this limit may also apply to you.

Raising the MAGI limits for Roth IRA eligibility means that more single professionals and married couples can qualify for this investment strategy. A Roth IRA gives you the opportunity to set aside income that earns interest at a tax free rate. With a Roth IRA, there are no maximum age limits on your eligibility to begin collecting distributions. You can continue to make contributions to your account throughout your lifetime, if you wish. By comparison, the traditional option requires that you start collecting distributions by age 70 1/2.

Eligible and Ineligible Compensation

IRS restrictions apply to the type of compensation that can be contributed to your account. If you work for an employer, you may contribute funds from your wages or salary, commissions, tips, fees or bonuses. Any money that you receive from your employer for services rendered for your job meets the requirements for Roth IRA eligibility. Military differential pay, nontaxable combat pay and taxable alimony are also considered eligible compensation. [1]

If you are self employed, similar standards for Roth IRA eligibility apply. You may contribute funds from any of the net income you earn through your business, or your gross income minus the expenses of operation. A percentage of your self employment taxes can also be deducted from your taxable compensation.

There are some types of income that are ineligible for contributions. These include income from interest and dividends earned from savings and investment accounts and earnings from property maintenance or rental income. Any earnings that would generally not be included in taxable income, such as benefits from a life insurance policy, cannot be contributed.

Eligibility for Distributions

When you're ready to wrap up your career and enter a new phase of financial independence, the flexibility of Roth IRA eligibility for distributions may be very useful. At the age of 59 1/2, you become eligible to collect distributions, provided that you have invested in the account for at least 5 years. [1] You may collect distributions from your earnings before age 59 1/2 if you are disabled, or if the distribution is made to your beneficiaries after you pass away.

Instead of taking mandatory distributions at the age of 70 1/2, you can allow the funds in your account to continue to grow for the rest of your life, if you wish. Many retirees appreciate the security of having a fund that will continue to earn after they have reached the age of 70. As the average life span increases, a 70-year-old may expect to live longer than retirees in previous generations. As you consider the Roth IRA eligibility requirements, consider how this versatile strategy may benefit you as you plan for your retirement date and beyond. 01/09/2012

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