What Are the Eligibility Rules for a Roth IRA?

By Kent Ninomiya

  • Overview

    The Internal Revenue Service (IRS) has very strict eligibility rules for a Roth IRA. Any violation of these rules will result in an investor being fined by the IRS. It is important to know whether you are eligible to open a Roth IRA to begin with. After that, you must find out how much you are eligible to contribute to your Roth IRA each tax year. This amount changes from year to year, depending on your income and as you age.
  • Opening Eligibility

    The IRS only allows taxpayers making less than a set amount of money to open a Roth IRA. To figure out if you are eligible, calculate your Modified Adjusted Gross Income (MAGI) for the tax year you intend to open your Roth IRA. This is your gross income plus your investment income, minus alimony, business and moving expenses. MAGI differs from Adjusted Gross Income because it does not subtract certain deductions like those for rental losses, education and self-employment. In 2009, the IRS allowed single taxpayers with MAGI less than $120,000 and married filed jointly taxpayers with MAGI less than $176,000 to open a Roth IRA. Anyone who makes more than that--and married filing separate taxpayers--cannot open a Roth IRA.
  • Contribution Eligibility

    The IRS requires you to meet income guidelines every year you make the maximum contribution. If you happen to have a Modified Adjusted Gross Income higher than the limits, you cannot add to your previously existing Roth IRA during that tax year. In 2009, the IRS allowed partial contributions for single taxpayers with MAGI between $105,000 and $120,000. For married filed jointly taxpayers, partial contributions were allowed for MAGI between $166,000 and $176,000. Married filing separate taxpayers cannot contribute to a Roth IRA.
  • Taxable Compensation

    Taxpayers are only allowed to make contributions to a Roth IRA with money from taxable compensation. This is money from a paycheck and not from investments. If your taxable compensation for a tax year is less than the IRS limits for contributions to a Roth IRA for that tax year, you can only deposit up to your taxable compensation. If you make a Roth IRA contribution with money other than taxable compensation, the IRS will fine you 6 percent of the excess contribution per year until it is withdrawn.
  • Contribution Limits

    In order for contributions to a Roth IRA to be eligible, they must be at or less than the limits set for that tax year. In 2008 and 2009, the limit was $5,000 if you were younger than 50 years old and $6,000 if you were older.
  • Rollover Eligibility

    In order to be eligible to rollover a Traditional IRA to a Roth IRA, you must have a Modified Adjusted Gross Income of less than $100,000 during that tax year. If you made more than that, you cannot perform the rollover during that tax year.
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