Not just anyone can open a Roth IRA. The IRS has set up rules for contributions based on the type of income you earn and the amount of income you earn in a year. For people under 50, the maximum is usually $5,000 per year. If your qualifying income is less than $5,000, you can only contribute up to the total amount of your earned income.
You must earn some form of taxable compensation or income during the year to be able to contribute to a Roth or even a traditional IRA. If you have a regular job and receive a W-2 from your employer, your income qualifies. Tips and commission count as earned income as well. If you are self-employed, any income you earn qualifies. In some cases you can contribute to a Roth IRA if you had non-taxable income, such as combat pay if you served in the Armed Forces.
Some types of income do not count as earned income for the year. If you received income only from these sources, you cannot contribute to a Roth for the year. Non-qualifying income includes amounts you earned from interest and dividends as well as any amounts you might have earned from real estate, such as rental income. It also includes income you earned from certain types of partnerships and income that was deferred from the previous year.
The Roth IRA is designed for people who fall within certain income guidelines. As of 2012, single people who earn more than $125,000 and married couples filing jointly who earn more than $183,000 cannot contribute to a Roth. If you are single and earn more than $110,000, or a married couple earning more than $173,000, you can still contribute, but not the full $5,000.
Roth IRA Rollovers
If you earn too much to open and contribute to a Roth IRA, there is still a way to establish one. It's possible to contribute to a traditional IRA, then roll over that amount to a Roth IRA. The IRS removed income limits from Roth IRA rollovers in 2010, so even if you earn a high income, you can still benefit from a Roth IRA. If the amount you contributed to the traditional IRA was deductible initially, you will have to pay tax on the amount you roll over.
Based in Pennsylvania, Emily Weller has been writing professionally since 2007, when she began writing theater reviews Off-Off Broadway productions. Since then, she has written for TheNest, ModernMom and Rhode Island Home and Design magazine, among others. Weller attended CUNY/Brooklyn college and Temple University.