Now this Individual Retirement Arrangement is for everyone. Roth IRA doesn’t take into account your age,  you need not show your contributions in your returns form and you can contribute even for your spouse. What more do you need from a retirement plan?

Roth IRA can be an account or in the form of an annuity. And you can set up a Roth IRA at anytime of the year.

Who can set up a Roth IRA?

You can set up a Roth IRA if you have a taxable income and your modified AGI (Adjusted Gross Income) meets any one of the following requirements – The AGI is less than $10000, you are married but filing your returns separately and you live with your spouse, or your modified AGI is less than $ 176000, you are married and filing your returns jointly or you are a qualifying widow/widower and finally your AGI is less than $120000, you are single and you are the head of your house or you are married but filing separately and you don’t live with your spouse.

What about contributions?

As mentioned earlier contributions need not be shown in your tax returns form. But how much you can contribute to a Roth IRA? The answer to this question depends on whether you are making any other contributions to a traditional IRA also. If you are not contributing to traditional IRA and only investing in Roth IRA then your contribution limit is the lesser of the following two amounts – your taxable income of the year or $5000 ($6000 in case of those above 49 years of age).

Now if you are contributing to both traditional and Roth IRA,  then the contribution limit calculation gets a little complex: It is same as the amount if you are contributing to Roth IRA alone, but all your other contributions (yours and not the contributions made by your employer on your behalf) to other IRA’s except the Roth IRA is deducted from that amount. Confusing right?

It simply means your contribution limit will be the lesser of the following two amounts – your taxable income minus all contributions made by you to other IRA’s and $5000 ($6000 in case of those above 49 years of age) minus all contributions made by you to other IRA’s.

However one important point here is, if your modified AGI is above a certain limit as set by the IRS your contribution amount will be reduced. Also a 6% excise tax will be levied if you have given excess contribution to your Roth IRA in any year. Traditional, SEP or SIMPLE IRA’s can be converted to a Roth IRA, by conversion methods such as roll over, trustee to trustee or same trustee transfers.