The Roth IRA account was created in 1997 by the passage of the Taxpayer Relief Act of 1997 who's chief sponsor was the late Senator William Roth of Delaware. (Thus the name of retirement account). A Roth IRA (Individual Retirement Arrangement) can invest in securities, usually common stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible).
The reason that Roth IRAs have become so popular since their passage is the fact that by investing in one you'll have tax free money waiting for you at retirement. Who wouldn't love to be withdrawing their money at retirement, and not have to watch it dwindle away due to taxes!
For the 2010 year many of the rules and contribution limits have remained the same, but one thing does set this year apart. The 2010 Roth IRA conversion event. Here are some of the key rules and provisions that you need to know for the Roth IRA for 2010.
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Contribution Limits For 2010
The contribution limits for a Roth IRA in 2010 are essentially remaining the same at $5,000. If you're age 50 and above you are allowed an extra catch-up contribution of $1,000 for a grand total of $6,000. No news yet as to if the limits will be increasing next year, but if you're interested you can see the contribution limits going back til 2002 for Roth IRAs in the table below. As you can see they have gone up several times in past years, although not since 2008.
|Year||Age 49 and Below||Age 50 and Above|
Roth IRA Phaseout Limits Increased Slightly
This year the phaseout limits for contributing to a Roth IRA did go up ever so slightly for those filing “Married Filing Jointly”, but only $1000. Single filers didn't see the phaseout limits increase at all.
|IRA Type||Single||Married Filing Jointly|
|Roth IRA||$105,000 – $120,000||$167,000 – $177,000|
|Traditional IRA||$55,000 – $65,000||$89,000 – $109,000|
Easier Rollovers From Your Old 401(k)
Before the 2010 tax year it wasn't a simple process to do a 401k rollover and convert a 401k into a Roth IRA. You had to go through all sorts of contortions to make it happen. First you had to roll the 401k into a Traditional IRA. Next you would have to open a Roth IRA and complete the conversion paperwork. Once the conversion was done you could then close the Traditional IRA.
In 2010 you don't have to fill out all that extra paperwork for nothing, instead, you can now do a direct rollover into your Roth IRA and bypass the Traditional IRA part of the process. Less paperwork for everyone!
2010 Roth IRA Conversion
2010 is the year the one year event where people can convert their traditional IRA’s, SEP IRA’s, Simple IRA’s, old 401k’s, old 403b’s into a tax free Roth IRA account. Why would they want to do this? A variety of reasons might make the conversion attractive for some people.
- Tax diversify: They want to diversify their tax situation at retirement because they're not sure if they'll be in a higher or lower tax bracket. By diversifying they'll have a variety of tax free and taxable accounts available to them at retirement.
- Not usually eligible to convert: Due to Roth IRA income phaseout limits, some high income earners aren't normally eligible to contribute to a Roth IRA. During this one year event, they can convert their traditional taxable account to a Roth, despite income.
- They want to convert – and spread out tax liability: During this conversion event people who convert their accounts can spread out the taxes they owe on the conversion over 2 years, 2011-2012.
For more details about the Roth IRA conversion, check out this article: 2010 Roth IRA Conversion Rules
So there are a few changes and special things to be aware of about the Roth IRA in 2010. So head on out there, sign up for your Roth IRA, and get saving you cash tax-free!
Do you have a Roth IRA? If so, are there other things you think people should be aware of? Tell us your thoughts on Roth IRAs in the comments.