3 Roth Ira Rules You Need To Know Before It's To Late

Here’s a look at the current Roth IRA rules, as well as the changes that are “coming soon”. The definition of a Roth IRA became public law in 1996, due to legislation sponsored by Senator William Roth of Delaware. While similar to a traditional retirement account, there are several significant differences.

Rule #1 - Pay Fewer Taxes Now OR Pay Less Later

With a traditional account, contributions are tax deductible, pre-tax or tax-deferred. Under the Roth IRA rules, contributions are taxed as regular income, but qualified distributions are not taxed. Will you be in a lower tax bracket after retirement or a higher one? That might depend on the investment choices that you make today.

Rule #2 - When do You Want to Retire?

Under the definition of a Roth IRA, you can withdrawal your original contribution at any time, without paying taxes, once a seasoning period (currently 5 years) has passed. Any withdrawal from a traditional account is taxed as regular income. Any withdrawals from traditional accounts are taxed as regular income.

Further, under the definition of a Roth IRA, you may begin taking tax-free distributions at any time, once your reach the age of 59 ½, but you are not required to take distributions once you reach a certain age. With a traditional account, you must begin taking distributions after you reach the age of 70. You might want to retire when you’re 70. You might not. You might have other sources of income. You might be planning to leave the money in this account to your descendants. You have that option under the Roth IRA rules, but only if you die before the age of 70 will your beneficiaries end up with everything in the account.

Rule #3 - Income Limitations

Under the current definition of a Roth IRA, you may only make contributions if you are single and your “modified adjusted gross income” (MAGI) is below $116,000 or you are married filing jointly and your MAGI is below $169,000. You may only convert a traditional to a Roth-type, if your MAGI is less than $100,000.

In 2010, that limitation will be removed, at least for a while. Now, converted funds are taxed as regular income for that year, but it is possible that the conversion will save you money in the future, particularly, if you make highly profitable investments; real estate, for example.

Under the traditional and the Roth IRA rules, you can use the funds to invest in most types of real property, as long as you have a self-directed account. Because the definition of a Roth IRA protects profits form capital gains and other types of taxes, lots of smart investors are going this route.

If you have no real estate investment experience, the “smart” thing to do is to get a little education, first. I’m not talking about paying for a software collection or a Robert Allen book. There are experienced investors that offer their advice freely.

So, take advantage of the Roth IRA rules and consider the real estate option. You might retire in the lap of luxury.

By: Jefferson Davis

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Visit www.RealEstateIraInvestor.com to find out more on how to use roth ira rules to your advantage and about a safe, smart, real estate program that will allow you to retire sooner rather than later. Jefferson Davis is an expert author in the Solo IRA field.