A Roth Individual Retirement Account (IRA) is a tax-friendly retirement savings plan which allows designated Roth contributions to the account. Unlike standard contributions, which are pre-tax, Roth contributions are included in gross income. As a result, Roth IRA earnings are non-taxable, providing the conditions of the Roth account are met.
The maximum amount which may be contributed to Roth IRA per year is the lower of earned income or contribution limit. Roth IRAs allow a maximum of $5,000 in contributions for 2011. Employees who are 50 years of age or older at the end of the tax year are also allowed an additional $1,000 in catch-up contributions. If you do not use the full amount of your IRA contribution limit in 2011, the difference does not carry over into 2012.
These contribution limits are over and above the contribution limits for a 401k. You may hold both a Roth IRA and a 401K at the same time.
However, the contribution limit is also subject to income limits, which are based upon Modified Adjusted Gross Income (MAGI). The exact phaseout range and limit depends on whether you are single or married, filing jointly. The calculation is not as complex as for traditional IRAs, which also depend on whether you are also covered by a work retirement plan.
2011 tax year
If you are a single filer, you can contribute the maximum amount to your Roth IRA if you earn less than $107,000. Your phaseout range is between $107,000 and $122,000. If you earn more than $122,000, you cannot make a designated contribution to a Roth IRA this year.
If you are filing jointly, you can contribute the maximum amount to your Roth IRA if you earn less than $169,000. Your phaseout range is between $169,000 and $179,000. If you earn more than $179,000, you cannot make a designated contribution to a Roth IRA this year.
Roth IRA conditions
Funds in a Roth IRA must be kept in the plan for a minimum of 5 consecutive tax years. Qualified distributions can begin anytime after the employee is 59-1/2 years old, provided the 5 year seasoning period has passed. An employee is also eligible for qualified distributions from his Roth IRA if he becomes disabled. Qualified distributions may be made instead to an alternative payee or beneficiary, providing one of these conditions is met.