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Tutorial: Who Can Establish and Fund a Roth IRA: Eligibility Requirements

 

 
A Roth IRA can be opened (established) by anyone, regardless of age, income, or marital status. As long as an individual is able to satisfy the financial institution's customer identification procedure (CIP) requirements, and is not legally prohibited from establishing an account in the US, the account can be opened. However, the funding methods are subject to eligibility requirements and restrictions.
 
 
Eligibility for Roth IRA Contributions
 
An individual must meet the following two requirements, in order to make a Roth IRA contribution:
 
  • Having Eligible Income or Compensation
 
An individual can make a regular contribution to a Roth IRA only if he has eligible income/compensation.  For this purpose, eligible income/compensation includes:
 
o   W-2 wages: This includes salaries, wages, tips, bonuses, commissions and other amounts usually the amount shown in Box 1 of Form W-2. An exception applies to nontaxable combat pay, which is usually reported in Box 12
 
o   Self-employment income: specifically, net earnings from self-employment. This usually applies to an individual who is a sole proprietor or a partner in a partnership. The income on which contributions can be based is the net earnings from self-employment, generally reduced by (a) the deduction for contributions made to an employer sponsored plan for the sole proprietor or partner and (b) the deduction for 50% of the individual’s self-employment taxes.
 
o   Taxable alimony and separate maintenance payment received under a divorce decree or separate maintenance arrangement.
 
o   Nontaxable combat pay for members of the US Armed Forces. These amounts are usually reported in Box 12 of Form W-2. US Armed force members who received combat pay that was excluded from income in 2004 and 2005 may use that income to make contributions for 2004 or 2005).[1] The deadline for making these contributions was May 28, 2009. See the Roth IRA Contributions Section for details.
 
 
 
Eligibility for Roth IRA Conversions
 
Prior to January 1, 2010, an individual was eligible for a Roth IRA Conversion if his MAGI was $100,000 or less and his tax-filing status was not married filing separately. However, these restrictions are repealed effective January 1, 2010.
 
Eligibility for Rollovers and Transfers
 
An individual can transfer or rollover  balances between Roth IRAs at anytime, and such transfers are not subject to any statutory requirements. Rollovers can also occur from qualified plans to Roth IRAs at anytime. However, the individual must satisfy the qualified plans’ requirements for making withdrawals from the plan in order for the rollover to occur.


[1] Heroes Earned Retirement Opportunities (HERO) Act of 2006
 
 
                    I.            Tutorial: Roth IRA Contributions
                  II.            Tutorial: Excess Roth IRA Contributions
                III.            Tutorial: Roth IRA Conversions
               IV.            Tutorial: Roth IRA Reconversions
                 V.            Tutorial: Roth IRA Rollovers and Transfers