Roth IRA Rules and Guidelines by Adam King

Many people have questions about Roth IRA rules. We hope to provide at least some of the answers here, as well as a basic definition of a Roth IRA and just a little background.

The Roth IRA was established in 1998 to provide alternatives to the traditional IRA. Most of the Roth IRA rules were established at that time, but the maximum annual contribution has changed over the years from $2000 to $5000 and will continue to increase starting in 2009 by $500 per year, because of inflation.

The simplest definition of a Roth IRA is this; an individual retirement account with specific eligibility and tax status requirements, as dictated by the Internal Revenue Service. Individual retirement accounts and the accompanying tax breaks came into being to encourage people to think about and plan for their own retirement, since most companies no longer offer in-house retirement benefits and social security is unlikely to provide a secure and comfortable retirement.

In order to fully understand the definition of a Roth IRA, it is helpful to compare the account to a traditional IRA. The major differences are outlined below.

When it comes to taxes, the Roth IRA rules require that income tax be paid on initial contributions, but interest and returns are not taxed. In addition, withdrawals and distributions are not taxed. In a traditional IRA, contributions are tax deductible, but distributions or withdrawals are taxed like normal income.

When it comes to income levels, Roth IRA rules allow individuals to make the maximum yearly contribution as long as they make less than $101,000 in a tax year. In a traditional IRA, full contributions are only allowed at income levels below $53,000.

With a traditional IRA, distributions must begin at age 70 ½ or the account holder will be penalized. Roth IRA rules allow account owners to leave the money in the account for as long as they like, there are no minimum distributions and no age restrictions.

With a traditional IRA, you can not withdraw funds until you reach the age of 59 ½ unless you become disabled. With the Roth, you can withdraw your initial contribution at any time.

The traditional and Roth IRA rules concerning investment options are the same. They are limited to what cannot be purchased with the account, things like art, collectibles and life insurance. Most investors stick with things like stocks, bonds and CDs, but real estate, mutual funds and other types of investments can be purchased with the account, as well.

When it comes to real estate, the rules are that neither you nor your family members may live in a dwelling owned by the account. Under the definition of a Roth IRA, self-dealing is not allowed. Transactions that benefit you or your family members personally are not allowed. So, you can't do things like live in a house owned by the account or use funds to invest in a business owned by a family member.

Not all brokers allow all types of investments within the IRA account. So, the Roth IRA rules that a broker outlines for you may vary. It usually takes some effort to find a broker that offers his clients everything allowed by law.

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