Rules and Regulations for Roth IRAs

Late last year, the IRS updated rules and regulations for Roth IRAs applicable in 2017. The new rules for Roth IRA were formulated using reviewed data from recent economic statistical figures, including national economic indicators, such as inflation. However, there are minimal but significant changes in the 2017 rules and regulations from 2016.

Here are some of the rules and regulations for Roth IRAs.

Earned income

You can only be eligible to participate in Roth IRAs if you “earned” income in the tax year that you plan to contribute. Earned income could be salaries, wages, commissions, taxable alimony, bonuses, tips or profits from your business.

Earned income, however, may not include capital gains derived from interest or dividends, rental property, or from pension payments.

Contribution limits

Standard annual Roth IRA contribution limits remain at $5,500 for individual contributors aged below 50 years, while members from ages 50 to 59 ½ may partake in the “catch-up contribution” that limits the annual contribution at $6,500 for individuals.

Where your earned income for a particular year is less than the contribution limits for that year, your contribution for that year is limited to your earned income for the same period.

For example, if your gross income for 2016 was $4,300, your Roth IRA contribution limit for 2016 is limited to a maximum of $4,300.

Phase-out Range

The phase-out range for individual filers for Roth IRA according to the 2017 rules and regulations went up from $117,000 in 2016 to $118,000 and, shuts at $133,000 for 2017. This amount is up from $132,000 for 2016.

For joint filers (married couples), the entire range (lower and upper) increased by $2,000 to $186,000 and $196,000 respectively for the year 2017.

The phase-out ranges represent the adjusted gross income (AGI) of the eligible participants. At the lower range ($118,000 for individuals, $186,000 for joint filers), the account holders can contribute the highest limit allowed for the Roth IRA. Along the phase-out range, the limit for a contribution to the Roth IRA decreased as we approach the upper range ($133,000 for single filers, $196,000 for joint filers). Those earning beyond the upper phase-out cannot hold Roth IRAs.

Qualifications for withdrawals

Roth IRAs has a five-year withdrawal rule that binds the tax-free status of the fund to a five-year mandatory ownership of the account devoid of funds withdrawal. Your account could incur taxes and a 10% penalty if you withdraw from your Roth IRA within five years of the first contribution before retirement. However, Roth IRAs do not have mandatory minimum distributions. Account holders qualify for a tax-free distribution at age 59 ½, or if the account holder has contributed for the last five years before attaining this retirement age.

Ordering rules for distributions

These rules are necessary if you are to avoid paying taxes and penalties. According to the IRS, ordering your distributions should follow the following sequence: regular contributions, taxable conversions, non-taxable conversions, then earnings.

Following this sequence allows you, as the account holder, to utilize the already taxed amounts that are qualified.

Note that the Roth IRA Rules and regulations for 2016 are still applicable until 17th April 2017 (tax-filing deadline) before any new rule for 2017 applies.

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