Retirement plans are excellent tax shelters, but you need to understand Roth IRA rules and other contribution requirements to maximize those tax savings. Essentially, contributions to a retirement savings plan are made on a pretax basis - employers match employee contributions to a plan, but that "income" isn't taxable until it's received, once the employee has retired.



With a Roth IRA, the contributions you make aren't tax deductible, however the withdrawals that you make in the future won't be taxed - making it a great option for those who expect to have higher incomes in their retirement.

To learn more about Roth IRA and traditional IRA rules, read on for information that can help you amp up your savings and earnings.

Roth IRA Limitations

Roth IRA contributions are limited at $5000 per tax year. However, if you're 51 or over, you can contribute up to $6000 to a Roth IRA. In 2009, those contribution limitations are expected to increase based on current inflation rates. They will go up in $500 increments.

Unfortunately, there are income eligibility requirements for a Roth IRA. Essentially, you can only make the maximum contribution if your Modified Adjusted Gross Income (MAGI) falls below a certain level. For example, a married couple may earn between $150,000 and $160,000 or lower and a single person can earn between $95,000 and $110,000 or lower. Otherwise, they must opt for a 401(k).

401 (k) Roth

If you are participating in an elective contribution plan at work, did you know that you can now choose to make some of those contributions Roth contributions. This is called a 401(k) Roth. With a Roth 401(k), the deductions made are not taken out of your taxable wages. However, they are still tax-free when withdrawn, and many are not included in federal income taxes.

The beauty of a Roth 401(k) is that there are no income restrictions on it. That means that no matter what your Modified AGI is, you can make contributions to a Roth 401(k). Also, the contribution limit is much higher. For those 50 and under, it's $15,000 and $20,000 for those over 50. There's also potential of a greater return on investment (ROI) thanks to the higher contribution limits.

Switching from a Traditional to a Roth IRA

Unfortunately, you can only convert a traditional IRA to a Roth IRA if your Modified AGI income is less than $100,000 per year. Also, if you're married, but file separately from your spouse then you are usually not allowed to convert your IRAs. However, your converted amount could be considered taxable income, though future growth is tax free. Finally, when you convert to a Roth IRA, you aren't required to make withdrawals at age 70.5.

If you're concerned about the Adjusted Gross Income restrictions currently in place for Roth IRA conversions, there is good news on the horizon. After 2010, new Roth IRA rules will eliminated the $100,000 income limit on conversions from traditional IRAs to Roth IRAs. Also, any taxes due on 2010 conversions can be paid in a two-year installment.