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5 Key rules of the Roth IRA in 2010

July 15th, 2010

Jason Holmes is a regular writer with Debt Consolidation Care and is also a contributory writer with other financial sites. His expertise is woven around various aspects of the debt industry and with his e-books he tries to impart to people the different situations and simple solutions to get out of difficult situations. Some of his works include e-books like Credit Score The Quintessential Therapy for a Happy Pocket, Take Creditors and Collection Agencies to Small Claims Court and My Story- From Depression To a Smile.

Do you have a Roth IRA account? If yes, then you should know about Roth IRA rules for 2010 so that you can use your retirement funds effectively. Go through this article to know about the key rules of Roth IRA in 2010.

Rules of the Roth IRA in 2010

Here are 5 key rules of the Roth IRA in 2010:

1. Maximum contribution limit: Roth IRAs have an annual contribution limit. In 2010, you can contribute $5,000 to a Roth IRA account. If you are above 50 years, then you can contribute an additional $1,000 for a total of $6,000. You can own both a Roth IRA and Traditional IRA. However, you should know that the maximum IRA contribution limit is $5,000 including both Traditional and Roth IRAs. This implies that if you contribute $2,000 to a Traditional IRA, then you can only contribute $3,000 to a Roth IRA.

2. Easier to convert 401k into Roth IRA: Before 2010, it was very difficult to convert a 401k into a Roth IRA. Previously you had to establish a Traditional IRA and then roll the 401k into a Traditional IRA. Next you had to open a Roth IRA account and then complete the conversion formalities. When the conversion was complete, you had to close the Traditional IRA account as it was no longer required. But in 2010, you can directly rollover your 401k into a Roth IRA.

3. Income limits: There are some income limits that restrict your capability to contribute to a Roth IRA. The income limits are based on your adjusted gross income and federal income tax filing status.

* Single filers: If you are “single” or “head of the household” and “married filing separately” and your adjusted gross income is $105,000, then you can contribute the full $5000 to a Roth IRA account. You can make partial contribution when your adjusted gross income is between $105,000 and $120,000. And in case your adjusted gross income exceeds $120,000 then you will not be able to make contribution to a Roth IRA.

* Joint filers: Joint filers with adjusted gross income between $167,000 and $177,000 can make a full contribution to their Roth IRA account.

* Married filing separately: If you are married and filing separately and your adjusted gross income exceeds $10,000, then you can’t contribute to a Roth IRA account.

4. Withdrawal rules: Under certain circumstances, you can withdraw funds from your Roth IRA account without paying a penalty. You will have to pay 10% early withdrawal penalty as well income taxes (on the amount withdrawn) if you take out funds from the account before you reach 591/2 age.

5. Save tax: In 2010, taxpayers with adjusted gross income higher than $100,000 can directly convert a Traditional IRA to a Roth IRA. Usually a tax is imposed on the conversion amount. But according to the new rule, you can report 50% of the IRA conversion amount as taxable income in 2011. The remaining 50% of the conversion amount can be reported in 2012. This implies that the income taxes payable on the 2010 conversion amount can be spread over 2011 and 2012.

Finally, you have the option to withdraw from your Roth IRA account to make payments for qualified higher education fees while escaping the 10% early withdraw penalty.

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