A Roth individual retirement account is subject to most of the same rules and regulations that govern traditional IRAs, but there are some significant differences, including how the accounts are funded. Traditional IRAs are typically funded with pre-tax dollars, while Roth IRAs must be funded with after-tax dollars. The Internal Revenue Service has no prohibition against using your retirement income to fund your Roth IRA, but your contribution is limited to the amount of your earned income.
You can only contribute to a Roth IRA if you have earned compensation during the tax year. The IRS considers anything you receive in exchange for work -- such as salaries, wages, tips, commissions, bonuses, income from self-employment and fees -- to be earned compensation. Compensation does not have to be in the form of money. Bartered services, merchandise, goods or trips may qualify as earned compensation. Compensation may also include nontaxable combat pay, taxable alimony and military differential pay.
There is no age limit for contributing to a Roth IRA. Unlike a traditional IRA, which prohibits people who are older than 70 1/2 from making contributions, anyone who has earned compensation can set up and contribute to a Roth IRA regardless of their age. You can be retired and drawing a pension and still contribute to your Roth IRA, up to the limits prescribed by law, as long as you had earned income during the tax year.
You could contribute 100 percent of your earned compensation into your Roth IRA, up to a maximum of $5,000, as of the 2010 tax year. The maximum amount is increased to $6,000 if you were at least 50 years of age. The maximum amount of your contribution may be reduced or eliminated if your modified adjusted gross income was $167,000 or more and you filed your income tax return as married filing jointly or qualifying widow(er). The maximum amount of your contribution may be reduced or eliminated if your modified adjusted gross income was $105,000 or more and you filed your income tax return as single, head of household or married filing separately and you did not live with your spouse at any time during the year. If you filed your income tax return as married filing separately and you lived with your spouse at any time during the year the maximum amount of your contribution may be reduced or eliminated if your modified adjusted gross income was more than $0.
You can contribute to your Roth IRA as long as you had earned compensation during the year, but there is no requirement to use the income produced from your earned compensation to fund your Roth IRA. You may spend your earned compensation any way you wish, and fund your Roth IRA using money from your retirement income. The only stipulation the IRS makes is that you cannot contribute more to your Roth IRA than the amount you received in earned compensation.
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