Reddit Personal Finance Full Time Student Can Afford A Dog Roth IRAs Made Easy

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Roth IRAs Made Easy

What are Roth IRAs, and how do they work?

They are part of the Individual Retirement Account (IRA) family. They have a special place in that family because they are completely tax-free if you follow the basic rules. We’ll get to those rules in a moment.

Roth IRAs are like a special member of your retirement planning family, like a trusted dog. They can honestly handle your retirement “kitty” while keeping the tax wolves away from the door. But, like any dog, they can bite if you don’t know how to treat them.

So, here are some basic rules to set up your Roth IRA to be a happy pet.

1. Make sure you qualify.

qualifying income: Salaries, wages, tips, professional fees, bonuses, commissions, self-employment income, non-taxable combat pay, military distinction pay or taxable allowances: Salaries, wages, tips, professional fees, bonuses, commissions and taxable U.S. You are eligible if you have earned income. (Unfortunately, investment and rental income are not eligible.)

Also, your income must be under certain levels to qualify. For 2011 contributions, (made through April 16, 2012) your income must not exceed:

Single: Modified adjusted gross income (MAGI) needs to be less than $107,000, with a phase-out range of up to $122,000 for partial contributions.

Married filing jointly (MFJ): Combined income needs to be less than $169,000 MAGI, phase-out range goes up to $179,000.

Head of household or who filed married filing separately no Live with spouse during tax year: $107,000 MAGI with same phase-out range as single.

Married filing separately WHO did Live with spouse during tax year: Can’t contribute if you have more than $10,000 in income. An amount less than that.

Your modified adjusted gross income is the adjusted gross income (AGI) from your tax return, adjusted by things like student loan interest deductions, rollover conversions, and foreign income. Most people don’t have that much, and can use AGI from their tax returns.

2. How to Keep Your Roth IRA Tax-Free

Hold for at least five years and Until age 59 or later. Remember, IRAs are for retirement, so it’s best to nurture them in your later years.

If you actually need to use the money before you qualify for tax-free status, you can take it out under various hardship clauses. Some of these exceptions include tapping into an IRA for a first-time home purchase (up to $10,000 of IRA money you’ve held for 5+ years), disability, paying qualified educational expenses (tuition, books, school fees), or payments. Health insurance if you are out of work.

You can also withdraw from IRAs under substantially similar periodic payment (SEPP) rules. Get help if you want to do this, because it can be difficult. If you get it wrong there’s a potential bite from the IRS.

You can always take yours Contributions Out at any time without penalty or tax, not just your earnings. For a complete list of ways to withdraw Roth IRA money without penalty, check IRS Publication 590 or the book. Roth IRAs made easy.

What is a “bite” if you withdraw money early? This is a 10% penalty on your Roth IRA earnings, plus the payment of taxes.

3. Find out when, what and how much you can put into your Roth IRA.

If you qualify, you can keep small To: Your annual earnings and taxable compensation or IRA limits for that year. You can never contribute more to an IRA than you earn (or will earn) for that calendar year.

Annual IRA contribution limit The same applies to both traditional and Roth IRAs. For 2011, it is $5,000 for people under 50 and $6,000 for people 50 or older. Each year, the government announces IRA contribution limits for that year, and they gradually increase over time.

There is a 15 month window for contributions for any given year. The window opens on January 1 of the year and closes on April 15 of the following year (or the tax-filing date). For example, for calendar year 2011, you can contribute from January 1, 2011 and through April 16, 2012.

What types of investments can you hold? Use almost any type, such as mutual funds, stocks, bonds, certificates of deposit (CDs), exchange-traded funds (ETFs), and more.

A Roth IRA can be a wonderful way to save for your future. This can provide you with truly tax-free income – potentially saving you thousands of dollars over many years.

In addition to that benefit, Roth IRAs have no required minimum distributions (RMDs). Most employer retirement plans and other IRAs require that you start taking your money out (and tax it) when you reach age 70 1/2. Roth IRAs are satisfying retirement pets that will happily wait until you’re ready to use them.

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