by ward

Created on: May 20, 2008

Every year the Congress of the United States makes changes to Roth IRA contribution
rules. It is vitally important for the private American investor to familiarize themselves with these changes in order to both maximize their investment income and avoid penalties. First, though, let's review what you are putting your money into when you contribute to a Roth IRA.

SOME HISTORY OF THE IRA

The individual retirement account, or IRA, is a tax-sheltered retirement plan and was originally thirty four years ago to assist individuals not covered by company pensions. IRA rules were changed in 1981 to allow people to contribute up to $2,000 per year to such IRA accounts. The contributions are deductible from federal income tax payments. IRA monies can be put into a broad range of high-yield investments, with taxation deferred until money is withdrawn after retirement.

In 1998, Congress instituted the Roth IRA. Named after Congressman William Victor Roth, Jr., the Roth IRA is an account or annuity set up in the United States solely for the benefit of you or your beneficiaries. As an individual retirement plan, it differs from traditional IRAs in that contributions are not deductible. The earnings are tax-free, but there are no tax-deduction benefits for the contributions made each year.

2008 CONTRIBUTION CHANGES

FOR 2008, your Roth IRA contribution limit is reduced in the following situations:

*IF your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $159, 000, then you cannot make a Roth IRA contribution if your modified AGI is $169,000 or more.

*IF your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2008 and your modified AGI is at least $101,000, then you cannot make a Roth IRA contribution if your modified is $116,000 or more.

*IF your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than zero, then you cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

The contribution limit for Roth IRAs also depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs.

FOR 2008:

*IF your contributions are made only to Roth IRA's, then your contribution limit will generally be the lesser of $5,000 or your taxable compensation for the year. But, if you are age 50 years or older, then your contribution limit will generally be the lesser of $6,000 or your taxable compensation for the year.

*IF your contributions are made to Roth IRAs and traditional IRAs, then your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions for the year to all IRAs other than Roth IRAs. This means that your contribution limit is the lesser of $4,000 ($5,000 if you are age 50 or older) minus all contributions for the year to all IRAs other than Roth IRAs, or your taxable compensation minus all contributions for the year to all IRAs other than Roth IRAs.

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