Individual retirement arrangements (IRAs) were first authorized by the U.S. Congress in 1974 to allow certain taxpayers who did not have access to a qualified retirement plan at work to set aside some of their own earnings toward their retirement. Subsequent legislation extended the ability to contribute to an IRA to most taxpayers who have earned income, and introduced the Roth IRA, which offered a different set of tax advantages.
A Roth IRA has many of the same features as a traditional IRA, but there are some significant differences. You cannot deduct your contributions to your Roth IRA when you file your federal income tax return. All contributions are made with after-tax dollars, and since you have already paid taxes on these funds you may remove amounts equal to your contributions from your Roth IRA without incurring either an income tax obligation or a tax penalty. You must have had a Roth IRA account open and funded for at least five years before you can withdraw your earnings penalty free. You may take tax-free withdrawals of qualified earnings once you reach age 59 1/2 years. Non-qualified withdrawals of earnings will be taxed as ordinary income and will be subject to an additional 10 percent tax penalty.
The maximum amount you can contribute to your Roth individual retirement account is $5,000 as of the time of publication. The maximum amount increases to $6,000 if you are 50 years of age or older. You contribution may be limited based on your income and marital status. Your contribution may be reduced or eliminated if you are married filing a joint return or are a qualifying widow(er) and your modified adjusted gross income is at least $167,000. Your contribution may be reduced or eliminated if you are single, head of household, or married filing separately and did not live with your spouse at any time during the year,and your modified adjusted gross income is at least $105,000. If you lived with your spouse at any time during the year and you file your tax return as married filing separately, your contribution may be reduced or eliminated if you had any modified adjusted gross income.
You can contribute an amount equal to 100 percent of your earned income, up to the maximum, into your Roth individual retirement income. The Internal Revenue Service (IRS) does not stipulate where the funds that are contributed into your Roth IRA must originate, only that your contributions may not exceed the limits prescribed by law. You may spend your earned income any way you please, and fund your Roth IRA from any other source, including unearned income sources such as dividends, interest, pension payments and annuities.
Funds you receive from an annuity may be fully taxable to you in the year you receive them if you did not contribute anything toward the annuity, if your employer did not withhold contributions from your wages to fund the annuity or if you have already received all of your tax free contributions. Annuity payments may be subject to a 10 percent tax penalty if you receive them prior to reaching 59 1/2 years of age. You cannot count annuity payments as earned income toward your Roth IRA contributions. If you did not have earned income during tax year, you cannot contribute funds from your annuity into your IRA. You may roll over an annuity plan into a Roth IRA in the same manner that you can roll over funds from a traditional IRA into a Roth IRA.
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