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The following information is a brief summary of the tax treatment of Roth IRAs and traditional IRAs. It is for general information only and not intended to be a complete explanation of the federal income tax laws applicable to these accounts.
Contribution Limits
An individual may contribute up to $5,000 ($6,000 if age 50 or over) each year to a Roth IRA if he or she has "earned income." Earned income includes wages (from an employer), net earnings from self-employment and taxable alimony. For purposes of this $5,000 limit, earned income does not include investment income such as dividends, interest and capital gains.
A taxpayer can contribute an additional $1,000 ($1,500 if age 50 or over) a year to his or her Roth IRA if he or she has "unearned income" of less than $10,000. Unearned income includes capital gains, investment interest and any unemployment compensation received during the year. Unearned income also includes distributions from traditional IRAs which were converted into Roth IRAs in the same year. The amount of unearned income to be used in this calculation is determined after all distributions are received in the tax year.
A taxpayer who is married and files a joint return may not contribute to a Roth IRA for the year in which either spouse reaches age 70 1/2. This is because of the rule that does not allow a traditional IRA to be funded with an amount in excess of the individual's unrecovered basis from an earlier conversion. A spousal Roth IRA can be funded if the non-participating spouse takes no income distributions from his or her traditional IRAs during the year.
Contribution Limits
An individual may contribute up to $5,000 ($6,000 if age 50 or over) each year to a Roth IRA if he or she has "earned income." Earned income includes wages (from an employer), net earnings from self-employment and taxable alimony. For purposes of this $5,000 limit, earned income does not include investment income such as dividends, interest and capital gains.
A taxpayer can contribute an additional $1,000 ($1,500 if age 50 or over) a year to his or her Roth IRA if he or she has "unearned income" of less than $10,000. Unearned income includes capital gains, investment interest and any unemployment compensation received during the year. Unearned income also includes distributions from traditional IRAs which were converted into Roth IRAs in the same year. The amount of unearned income to be used in this calculation is determined after all distributions are received in the tax year.
A taxpayer who is married and files a joint return may not contribute to a Roth IRA for the year in which either spouse reaches age 70 1/2. This is because of the rule that does not allow a traditional IRA to be funded with an amount in excess of the individual's unrecovered basis from an earlier conversion. A spousal Roth IRA can be funded if the non-participating spouse takes no income distributions from his or her traditional IRAs during the year.
