Roth IRA Rules for 2009
Iknow, I know. Another post on the Roth IRA? I wouldn’t write about it again, if I didn’t feel it wasn’t important to write about. If you haven’t realized this, the Roth IRA and Roth 401k will have a huge impact on retirement planning over the course of the next several decades and it’s important to understand how the rules work.
For the Gen X and Gen Y crew, the Roth IRA will be an important piece of their investment arsenal. Actually, for anybody under the age of 50 the Roth IRA rules as the best retirement plan option in this writers humble opinion. I don’t want to isolate all my baby boomers out there. Depending on your planning needs, the Roth IRA could make sense for you as well. For 2009, there have been some significant changes in the Roth IRA rules and phaseout limits. Here’s what you need to know on the Roth IRA rules for 2009.
Update: Check out 7 Things to Know About Roth IRA for 2010.
If this article was helpful, you may also want to check out these posts as well: 7 Things To Know About The 2010 Roth IRA Conversion, 2009 401k Contribution Limits Have Increased, 2010 Traditional IRA to Roth IRA Conversion Tax Rules
1.The annual contribution limit for 2009 has stayed at $5,ooo.
If you are over the age of 50, the “catch up” contribution has stayed at $1,000. That’s a a total of $6,000 for the baby boomer looking to maximize their retirement savings.
2.Roth IRA Conversion Rules.
As I stated previously, if your income limits allow, you may want to convert to a Roth IRA with the market being down as much as it is. The only downside is that you have to fit the tax bill all this year (not actually due until April 15th, 2010). If you wait until the 2010 Roth IRA Conversion Event you have two things to consider:
- The IRS is allowing you to spread that tax bill over two years and the taxes are not completely due until 2012.
- If the market does recover in 2009 (fingers crossed, knock on wood, click my heels three times…) and your investments appreciate, you’ll be fitted with a larger tax bill. Decisions, decisions.
3. The Roth IRA Savings Account
One of the coolest things about the Roth IRA is that you can pull out your contributions at any time, which is a huge difference that it’s Traditional IRA and 401k counterparts. Basically, it allows to treat your Roth IRA like a savings account having access to your money whenever you need it. Is it really that simple? Kind of. Here’s a few things to keep in mind.
- It just applies to your contributions (money you put in), not the earnings or interest you make off those contributions. The earnings are subject to the IRS Qualified Distribution Rule.
- If you put $5,000 in your Roth IRA and buy one stock (or any other investment for that matter) and it loses value, you can’t withdraw the $5,000. It’s based on the actual investment value.
4. Free Money, Then Tax Free Money
As much as I love the Roth IRA, it doesn’t mean it’s the first place you need to stick your retirement savings. If your employer’s 401k offers a match, take the free money. After the 401k match, then it’s time to get the tax free money of the Roth IRA.
In case you missed that…..Roth IRA = Tax Free Money.
5. Roth IRA Phaseout Limits Have Increased
For those that may have missed the “tax free” boat last year, the good news is that the IRS has increased how much you can earn in 2009 and still be able to contribute. For a single filer, the phaseout range begins at $105,000 AGI and is completely phased out at $120,000. For a joint filers (this is good news for me), the phaseout range starts at $166,000 and phases out at $176,000 AGI.
6. Change Your Mind on Converting? Just Recharacterize
Without getting too detailed (you can read more in another post), if you do convert and decide you want to go back to the Traditional IRA, you can do what’s called an IRA recharacterization.
7. Don’t Get Confused About 2010
The 2010 conversion event allows you to convert your traditional IRA’s or old 401k’s into Roth IRA’s no matter your income limit or AGI. That doesn’t mean that anybody can make a “new” contribution for 2010. For example, let’s look at a joint filer that makes $225,000 AGI. They would be allowed to convert to a Roth IRA, but not be allowed to put in any new money. Probably won’t make a difference when you consider let’s say converting $70,000 to a Roth IRA vs. adding a new contribution of $5,000. Time value of money will make the $70,000 conversion a nice little tax free nest egg waiting for you at retirement.
*Restrictions, penalties and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted.
Securities offered through LPL Financial member FINRA / SIPC.
