Roth IRA Rules for 2014

Roth IRA Rules for 2014 explained by professional Forex trading experts the “ForexSQ” FX trading team. 

Roth IRA Rules for 2014

You probably know that, for investors, a Roth IRA is generally considered superior in every respect to a Traditional IRA.  To see a complete rundown of just how superior, check out this side-by-side comparison.  However, the Roth IRA rules are different from the Traditional IRA rules so it’s important to understand how these special tax shelters work if you plan on using them to build wealth while collecting dividends, interest, and rents tax-free.

 By covering the more important of these rules you might be able to better protect yourself from some unpleasant, and expensive, consequences.

Roth IRA Rules for Income Limit Eligibility in Tax Year 2014

Unfortunately, one of the strictest Roth IRA rules has to do with income limit eligibility.  In order to qualify for a Roth IRA in any given tax year, you have to earn less than the maximum modified adjusted gross income figure published by the IRS.  This modified AGI is based upon several calculations and involves taking your adjusted gross income and adding back certain retirement deductions, rental losses, student loan interest, self-employment tax, and a few other lines on the tax return.

For tax year 2014, this means:

Roth IRA Rules for Income Limit Eligibility – Married Couples Filing Jointly in Tax Year 2014

  • Married, filing jointly: $181,000 or less = Full Roth IRA eligibility
  • Married filing jointly: $181,001 to $191,000 = Begin phase out of Roth IRA eligibility
  • Married filing jointly: $191,000 or more = Not eligible to fund a Roth IRA under the existing rules

Roth IRA Rules for Income Limit Eligibility – Married Couples Filing Separately in Tax Year 2014

  • Married, filing separately: $0 = Full Roth IRA eligibility
  • Married, filing separately: $1 to $9,999 = Begin phase out of Roth IRA eligibility
  • Married, filing separately: $10,000 or more = Not eligible to fund a Roth IRA under the existing rules

Roth IRA Rules for Income Limit Eligibility – Single People in Tax Year 2014

  • Single: $114,000 or less = Full Roth IRA eligibility
  • Single: $114,001 to $129,000 = Begin phase out of Roth IRA eligibility
  • Single: $129,000 or more = Not eligible to fund a Roth IRA under the existing rules

If you find that you’re not eligible to fund an account under the Roth IRA rules, never fear.  You can probably still get around the regulation by doing something known as a backdoor Roth, which involves funding a Traditional IRA then converting it to a Roth IRA.

Roth IRA Rules for Contribution Limits in Tax Year 2014

Because the Roth IRA offers such incredible protection from taxes, Congress severely limits the amount of money you can contribute to one each year.  You can only contribute up to your earned income (amounts generated from salaries, wages, small business profits, commissions, freelance income, tips and bonuses), meaning if you made only $2,000 last year, you can’t fully fund a Roth IRA.  On the other hand, if you aren’t employed but your spouse is, under most circumstances, the Roth IRA rules allow you to fully fund your own so-called “spousal” account alongside your working husband or wife.

 This is so stay-at-home parents aren’t penalized.

  • Taxpayers 49 years or younger = $5,500 maximum Roth IRA contribution limit
  • Taxpayers 50 years or older = $6,500 maximum Roth IRA contribution limit

Imagine you and your spouse made $100,000 last year.  You are a stay-at-home parent.  Your spouse is 51, you are 49.  Under the existing Roth IRA rules for 2014, you could contribute $5,500 to your Roth IRA and your spouse could contribute $6,500 to his or her Roth IRA.  As a family, that means you’d be sheltering $12,000 in new money in your Roth IRAs, allowing you to enjoy a lot of advantages in compounding the stocks, bonds, mutual funds, real estate, or other investments you decide to acquire.

Roth IRA Rules for Contribution Deadlines

You are allowed to contribute to a Roth IRA no later than the official tax deadline following the tax year in question.

 Extensions are not permitted.  For example, if the official tax deadline is April 15th, 2015, you could fund your Roth IRA for tax year 2014, under the 2014 years, no later than April 15th, 2015.

The rules are different for other types of IRAs, such as SEP-IRAs, which allow you to extend the contribution funding deadline along with your tax returns, often to as late as October.

Roth IRA Rules Require Married Couples to Maintain Separate Accounts

All Roth IRAs must be individual.  Married couples cannot combine their Roth IRA into a single account, but rather, must each have their own unique plan established with the financial institution they have chosen.  You don’t have to fund both Roth IRAs, you can fund one, the other, or both, provided you meet the other criteria.

Roth IRA Rules for Tax Deductions

Any amount you contribute to a Roth IRA is not tax deductible.  However, in exchange, under almost all circumstances, the money you make within your Roth IRA should be completely and totally tax-free.  (Some exceptions exist, especially for something known as the Unrelated Business Income Tax, or UBIT, but that will never apply to 99% of you.)

Practically, this means that under the present Roth IRA rules, if you can somehow grow your account to $10,000,000+ and collect $400,000+ a year in cash dividends, you won’t have to pay a penny to the IRS either when the dividends are deposited into your account or when you withdrawal the money during retirement.  In contrast, the Traditional IRA rules allow most people to deduct the initial contribution from their income taxes, earn tax-free investment income until retirement, then pay regular, ordinary income tax on withdrawals upon reaching certain age eligibility.

Roth IRA Rules for Withdrawals

You can make a withdrawal of principal you’ve contributed to a Roth IRA at any time, tax free, without penalty, under most circumstances.  If you decide to make a withdrawal of the investment income that has been generated within the account, and you do not meet one of the special Roth IRA rules for exemption, you can get slammed with a 10% penalty at the Federal level.  Tax laws change all the time so you may also incur state and local taxes; check with your tax adviser.

What are those exemptions?  There are eight of them, each spelled out more completely in this article on Roth IRA rules for avoiding the early withdrawal fee, but the short run-down is:

  1. The permanent disability of the Roth IRA owner
  2. The death of a Roth IRA owner
  3. Withdrawals made to pay non-reimbursed medical expenses in excess of 7.5% of your adjusted gross income
  4. Up to $10,000 once in your lifetime to help pay for a house
  5. Certain higher education expenses under certain limited circumstances
  6. Money paid to the Internal Revenue Service from the Roth IRA after it has won a levy against the account
  7. Medical insurance premiums if you have been on unemployment for longer than 12 weeks
  8. Turning 59.5 years old

Another of the Roth IRA rules for withdrawals has to do with mandatory distributions (money the government forces you to take out of the account once you reach a certain age to keep you from enjoying the tax shelter for too long).  Unlike a Traditional IRA, a Roth IRA will not force you to make mandatory minimum withdrawals when you reach age 70.5 years old.  If you want to keep compounding your money tax-free until you are 105, and you can make it that long, it’s currently permitted.  For a person with even an average lifespan, this can mean a lot of added net worth with no cut going to the Federal, state, or local government, producing substantially more wealth for your children, grandchildren, other heirs, and / or charitable beneficiaries.

If You Haven’t Already Funded One, Seriously Consider Opening a Roth IRA

I’ve gone so far as to describe a Roth IRA as the perfect tax shelter.  If you don’t have one, you are seriously missing out on some fantastic benefits.  They can be opened in only a few minutes and you don’t have to fund it in full – you can always kick in whatever you can afford presuming you otherwise meet the Roth IRA rules.  Get started with one today, even if all you do is open an account with a low-cost index fund and leave it alone for the next fifty years.

Roth IRA Rules for 2014 Conclusion

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