Roth IRA Alternatives & Income Limits

by Cindy Quarters

A Roth Individual Retirement Arrangement, or Account -- IRA -- has both income limits and contribution limits for account holders. While the benefits of a Roth IRA outweigh any limitations of this type of account for many people, for others the restrictions make them either unable or unwilling to have a Roth IRA. For those people, there are alternatives. A person should consider not only how much can be contributed to a retirement account, but also the tax implications of doing so.

Roth IRA Basics

The maximum annual income a person can make and still contribute to a Roth IRA as of 2011 is $107,000 for a single person and $169,000 for couples. This amount changes frequently and should be monitored by anyone with or considering a Roth IRA. The same is true of the cap of on an individual's contributions to his IRA, which is $5,000 per year, or $6,000 if he is 50 or over. One advantage of the Roth IRA is that the money is taxed before it is placed in the account. No taxes are due on withdrawals once the account owner reaches the age of 59 ½.

Roth 401(k)

A Roth 401(k) is similar to the Roth IRA in some respects. Money invested in this account is after-tax money, meaning taxes are paid on it before it goes into the account. This means it has a bigger impact on take-home pay than deposits into a traditional 401(k), where the contribution is deducted from pay before taxes are figured, reducing the account owner's tax liability at the time. The advantage is that, like a Roth IRA, the Roth 401(k) is not taxed when money is withdrawn once the account owner has reached the age of 59 ½. There is no income requirement for opening this type of account, but the annual limit is $16,500 for people under 50, $22,000 for those 50 and up.

Traditional IRA

A traditional IRA has the same annual contribution limits as the Roth IRA. If a person deposits anything over the limit, he will be assessed a 6% tax penalty unless the excess is removed prior to the income tax-filing due date. Contributions to a traditional IRA are made with pretax dollars, reducing the amount of tax liability at the time the money is placed in the account. The money is taxed at the owner's then-current tax rate when it is withdrawn. There is no income limit for contributing to a traditional IRA, but an employer-sponsored retirement program may impact contributions and tax status.

Educational Savings Account

The Educational Savings Account -- ESA -- is a good alternative to a Roth IRA for parents wanting to save money to pay for their children's education. Although allowable annual investment is low, only $2,000 in 2011, the money can be put into funds that can be expected to grow and will provide a tax-free source of funding for educational needs. Contributions are not tax-deductible. There are no income limits on an ESA account, and the person who has set it up, typically a parent or grandparent, can establish herself as the custodian of the fund.

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