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 aren't deductible, but income earned and future withdrawals are tax free.

To learn more about traditional and Roth IRA rules and how to maximize your contributions and savings, keep reading.

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, Roth IRA contributions are subject to eligibility limitations too. For example, a married couple that jointly earned between $150,000 and $160,000 or higher, or a single individual who earns $95,000 to $110,000 or higher can't contribute to a Roth IRA. Instead, they must depend on a 401(k) Roth.

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 However, they are still tax-free when withdrawn, and many are not included in federal income taxes.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.

There is good news for those who are lamenting the AGI restrictions on Roth IRA conversions. New Roth IRA rules stipulate that after the year 2010, the AGI limit on Roth conversions will be eliminated. In addition, any payable taxes owed from conversions in 2010 can be paid in two installments over the course of two years.