YOU ASK:

How to open a Roth IRA account?

WE ANSWER:

The first thing you need to do if you consider opening a Roth IRA account, is make sure that you meet the eligibility requirements for a Roth IRA. There are certain rules and restrictions that you might be subject to, as described below.

Opening a Roth IRA Account - Step by Step

  • In order to establish and fund a Roth IRA, you need to have received taxable income for the year either from an employer, or on a self-employed basis. There are certain restrictions that apply to the eligible compensation that Roth IRA holders must get in order to be allowed to make contributions to their Roth IRA accounts:
    • If the individual is employed, Roth IRA compensation must come from one of the following sources: wages, salaries, bonuses and commissions;
    • If you are self-employed, your net earnings from your business are taken into account, after deducting 50 percent of your self-employment taxes.
    • Alimony also counts as eligible compensation.
    • Profits coming from rent, property or investment, are not considered eligible compensation sources for opening a Roth IRA and contributing to it.
  • Anyone who meets the compensation eligibility requirements may open a Roth IRA account. However, in order to be eligible to make contributions to your account, your modified adjusted gross income, MAGI, must not exceed certain amounts. These amounts are adjusted every year due to changes in the inflation index, and they vary according to the tax-filing status of the IRA holder:
    • For single people and individuals who are married but filing separately and did not live with their partner at any time during the year, the limit is $114,000.
    • For married people who file a joint tax return, the limit is $166,000.
    • For married people who file separately but have lived with their spouse at any time during the tax year, the limit is $10,000.
  • You should make sure the organization you open a Roth IRA account with, has received approval from the IRS to sell IRAs. These are usually banks, saving and loan associations, brokerage companies, etc. All Roth IRA owners must make sure they are provided two very important documents: the IRA disclosure statement and the IRA adoption agreement and plan document.
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