Money Tree

Source: jdacommunity.com.

The Roth IRA rules the roost as the best retirement-planning vehicle available to most working Americans and their spouses. You do pay taxes on your initial contributions, but once invested, the money in a Roth IRA can compound without being taxed again. It can even be withdrawn completely tax-free in qualifying distributions during your retirement.

Additionally, the rules regarding Roth IRA contributions, investment options, and distributions are fairly easy to follow and not very restrictive, making it reasonably easy to qualify if you receive a paycheck. If you have IRS-recognized compensation-style income and your modified adjusted gross income is below the IRS' caps (which change each year according to inflation), then you can contribute.

Key Roth IRA rules to know
There are a few key rules worth knowing if you're just getting started and you'd like to participate in a Roth IRA. The table below summarizes them:

Rule

For Tax Year 2014

For Tax Year 2015

Contribution limit (under age 50)

$5,500

$5,500

Catch-up contribution limit (aged 50-plus)

$1,000

$1,000

MAGI limits, married filing jointly

$181,000-$191,000

$183,000-$193,000

MAGI limits, single or head of household

$114,000-$129,000

$116,000-$131,000

MAGI limits, married filing separately

$0-$10,000

$0-$10,000

Source: Internal Revenue Service. 

The contribution limits represent the maximum amounts you can potentially contribute to your Roth IRA if you're under age 50. If you're aged 50 or better, you can potentially also contribute the catch-up amount as well. The base contribution limits adjust with inflation in $500 increments, but for 2015, the inflation levels weren't high enough to justify an increase.

The MAGI limits represent the modified adjusted gross income levels at which your ability to contribute to a Roth IRA starts to phase out (the first number) and then disappear completely (the second). Those limits depend on your income level, marriage status, and the annual inflation adjustments the IRS calculates.

These additional Roth IRA rules are also important for those of us further into our retirement planning journeys:

  • There is no maximum age above which you're no longer able to fund your Roth IRA.
  • You never have to make "required minimum distributions" from a Roth IRA that you fund.
  • You can always withdraw your direct Roth IRA contributions (but not any gains on those contributions) tax- and penalty-free.
  • There is no longer an income limit for conversions to a Roth IRA from a traditional IRA or 401(k) retirement savings plan.
  • You can withdraw contributions converted from a traditional IRA or 401(k) without penalty after those rollover contributions have been in the Roth IRA for five years. 
  • So long as you're at least age 59-1/2 years old and your Roth IRA has been open at least five years, you can withdraw your earnings without taxes or penalties. 

A Roth IRA could transform your retirement
The money you get into your IRA, either through your direct contributions or through conversions from a traditional IRA or 401(k) retirement plan, can serve you incredibly well in your retirement. The promise of tax-free income in retirement is an incredible benefit that can be yours if you follow the key Roth IRA rules on funding and withdrawing money from your account.

As with most retirement plans, the sooner in your career you get started with a Roth IRA, the more you can get into the plan, and the more it will compound on your behalf. So get started now and set yourself up to enjoy the benefits of tax-free income during your golden years.

Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.