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Tax news you can use


Tax laws keep changing, but don't be the last to know about them. Here's the latest filing scoop.

Roth IRA rules

Retirement accounts get added attention during tax-filing season. That's because you must put money in an individual retirement account no later than the April return-filing deadline. It doesn't matter whether your contribution is to a traditional IRA (tax-deductible or nondeductible) or a Roth IRA.

In this tax tip:

If you opt for a Roth account, you won't get an immediate tax break, but you won't pay any tax on your money when you eventually take it out. The Internal Revenue Service, however, has specific rules on just who can have a Roth IRA and how much money can be contributed each year.

Contribution limits
In general, Roth contributions are the same as traditional IRAs. Last year, you were able to contribute up to $4,000. The maximum annual contribution stays at that amount this year.

If you were 50 or older last year, you could have put in an extra $1,000. That catch-up contribution amount remains the same for 2007.

However, you can't put more in any IRA than you make. So if your income is only $1,500, then $1,500 is the most you can contribute to a Roth.

Speaking of income, you must earn money to open any IRA. That means your only income can't be from unearned sources, such as investments. You must get paid wages, a salary, tips, professional fees or bonuses.

There is an exception that allows Roth accounts for nonworking spouses. If you and your spouse file a joint return but one does not work, the employed spouse can open and contribute to a Roth IRA for the unemployed partner.

Generally, the contribution limits for a spousal IRA are the same as for the account held by the working wife or husband. Check Chapter 2 of IRS Publication 590, Individual Retirement Arrangements for complete guidelines on opening a Roth spousal IRA.

But if you make too much money, you're not eligible to open a Roth or to contribute to the account you opened when you were earning less. For a Roth, your earned income (with some deductions you might have taken, such as for student loan interest, added back in), must be less than:

  • $160,000 if you're married filing jointly
  • $110,000 if you file as single, head of household, or married filing separately and did not live with your spouse during the year
  • $10,000 if you lived with your spouse at any time during the tax year but decide to file separately.

And even if you're not quite at the top of these pay ranges, your Roth contribution could be limited if your modified adjusted gross income falls within these limits:

  • $150,000 to $160,000 for married couples filing jointly
  • $95,000 to $110,000 for single or head-of-household taxpayers or married couples filing separately and who did not live with their spouse
  • $0 to $10,000 for married couples filing separately who lived together at any time during the tax year.

You still can add to your Roth in these cases, but not the full allowable amount. Publication 590 contains work sheets and examples to help you determine your reduced Roth IRA contribution amount.

There is no age limit for Roth accounts. Whereas traditional IRA contributions are barred for individuals older than 70½, you can be any age and still contribute to a Roth IRA.

And you can leave money in your Roth for as long as you live. The IRS doesn't require minimum distributions from Roths as it does with traditional IRAs.

If you find a Roth is the right IRA for you, you've got until the tax-filing deadline (which falls on April 17 this year) to open one or contribute to your existing account and have it count toward the prior year's limit. After that, the money will be counted as a contribution in the next filing season.

For complete information on Roths and definitions of terms, check out IRS Publication 590, Individual Retirement Arrangements.

Freelance writer Kay Bell writes Bankrate's tax stories from her home in Austin,
Texas, and blogs on tax topics at Don't Mess with Taxes

-- Updated: March 23, 2007
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