by Scott Reichel

Created on: July 29, 2008

The Roth IRA is one of the most powerful retirement tools available to investors. Even small investments can benefit from the tax-free growth that this account provides. For those with ample amounts available for their retirement savings, it's important to note the annual Roth IRA contribution limits and how those limits are affected by your age and income.

Anyone with earned income is eligible to contribute to a Roth IRA, regardless of age. The amount you can contribute, however, changes annually. For tax year 2008, the maximum contribution is $5,000. If you earn less than $5,000, however, your maximum contribution is equal to your total earnings. Beginning in 2009, the maximum contribution limit is scheduled to undergo annual inflation-adjustment increases of $500.

AGE AND INCOME ADJUSTMENTS

For 2008, taxpayers that are at least 50 years old by the end of the calendar year are eligible for a $1,000 "catch-up" provision that increases the limit to $6,000.

Your contribution limit may also be affected by your Adjusted Gross Income (AGI). For 2008, if your filing status is "single," you cannot contribute to a Roth IRA if your AGI is $116,000 or more. You face a "phase-out" limit if your AGI is between $101,000 and $116,000.

For married couples filing jointly, the phase-out limit is from $159,000 to $169,000. If your status is married filing separately, the phase-out limit is $0 - $10,000. Be sure to look for updated AGI limits with each new tax year.

IMPORTANT REMINDERS

The IRA contribution limits set forth by the IRS include both Roth IRAs and Traditional IRAs. Therefore, if you contribute the maximum to your Roth IRA, you cannot contribute to a Traditional IRA in that same tax year, and vice-versa. You may, however, contribute to both types of IRAs within the same year as long as your total contribution does not exceed the overall maximum limit.

Your contribution does not need to be made as a lump sum. You can invest periodically throughout the year, but if you set up an automatic monthly investment, do the math and make sure you will stay under the limit. A monthly investment of $416.67 will lead to an annual contribution of $5,000.04. Excess contributions are subject to a penalty tax and should be removed as soon as possible if they occur.

Finally, remember that there is no "carry-over" provision if you do not make a maximum contribution. A $3,000 contribution for 2008 will not give you an extra $2,000 for 2009. If you can't set aside a maximum annual contribution by the end of a calendar year, keep in mind that IRA contributions can be made until the tax-filing deadline in the following year.

As with any tax question, countless variables can affect us individually. Be sure to consult a tax professional if you need details beyond any article's general guidelines.

Sources: (http://www.irs.gov/pub/irs-pdf/p590.pdf) and (http://www.quicken.com/cms/viewers/article/taxes/25 850)

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