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You can contribute up to $6,000 annually to a Roth IRA, but income limits may reduce that

Quick Summary

  • Anyone with earned income can contribute to a Roth IRA, provided they meet the income limits.
  • Your income and tax filing status determine your eligibility to open a Roth IRA and how much you can contribute.
  • The contribution limit is the total amount you can contribute to all of your traditional and Roth IRAs.

A Roth IRA is an excellent way to save for retirement. While there’s no upfront tax break, your contributions and earnings grow tax-free. You can withdraw your contributions at any time, for any reason. And qualified distributions—those made after age 59 1/2 and when the account is at least five years old—are tax-free and penalty-free.

Important: If you make an ineligible contribution, you’ll owe a 6% penalty—every year until you fix the mistake. Make sure you know the rules. 

As a bonus, there are no required minimum distributions (RMDs) on Roth IRAs and no age limits for making contributions. That means you can keep adding to your account as long as you have earned income. And you don’t have to touch your money if you don’t need it. That makes a Roth IRA a great vehicle for wealth transfer.

As great a retirement savings tool as the Roth IRA is, you have to meet certain income limits to open and contribute to one. Here’s what you need to know.

You Can Only Contribute “Earned Income”

To qualify for a Roth IRA, you must have “earned income” in the year you want to make a contribution.

There are two ways to get earned income: You work for someone else who pays you, or you own or run a business or farm.

Important: You can open and contribute to a Roth IRA at any age, whether you’re 1 or 100. You just need to have earned income. 

Earned income includes money from wages, salaries, tips, bonuses, commissions, and self-employment income. In addition, the IRS considers disability retirement benefits as earned income until you reach the minimum retirement age you could have received a pension or annuity if you didn’t have the disability.

Of course, there are some types of income that don’t count as earned income, including:

  • Alimony
  • Child support
  • Income from rental property
  • Interest and dividends from investments
  • Pay you received while an inmate in a penal institution
  • Retirement income
  • Social Security
  • Unemployment benefits

Roth IRA Contribution Limits

For 2019, you can contribute up to $6,000 to a Roth IRA, or $7,000 if you’re age 50 an up. But you have to have enough earned income to cover the contribution.

If your earned income for the year is less than the contribution limit, you can only contribute up to your earned income. For example, if your earned income is $3,000, you can only contribute up to $3,000.

At the other end of the income spectrum: income limits. If you make too much money, you can’t open or contribute to a Roth IRA.

Income Limits and Tax Filing Status

The IRS uses different rules for income limits, based on your tax filing status for that year:

  • Married filing jointly or qualified widow(er).
  • Married filing separately (if you lived with your spouse at any time during the year)
  • Single, head of household, or married filing separately (if you didn’t live with your spouse at any time during the year).

Important: If you make too much money, you may still be able to contribute to a Roth IRA using something called a Backdoor Roth IRA

Here’s a summary of the Roth IRA income and contribution limits for 2019:

2019 Roth IRA Income and Contribution Limits
Filing Status Income (MAGI) Contribution Limit
Married filing jointly or qualifying widow(er) Less than $193,000 Up to the limit: $6,000 (or $7,000 if you’re age 50 and up)
$193,000 to $202,999 Begin to phase out
$203,000 or more Ineligible for a direct Roth IRA (learn more about a “Backdoor Roth IRA”)
Married filing separately (if you lived with your spouse at any time during the year) Less than $10,000 Begin to phase out
 $10,000 or more Ineligible for a direct Roth IRA (learn more about a “Backdoor Roth IRA”)
Single, head of household or married filing separately (if you didn’t live with your spouse during the year) Less than $122,000 Up to the limit: $6,000 (or $7,000 if you’re age 50 and up)
$122,000 to $136,999 Begin to phase out
$137,000 or more Ineligible for a direct Roth IRA (learn more about a “Backdoor Roth IRA”)

 

Roth IRA uses Modified Adjusted Gross Income (MAGI)

The IRA uses your modified adjusted gross income (MAGI) to determine if you’re eligible to open or contribute to a Roth IRA. This number can be close (or identical) to your adjusted gross income (AGI). It takes your AGI and adds back certain deductions, including:

  • Half of any self-employment taxes.
  • IRA contributions and Social Security.
  • Losses from a publicly traded partnership.
  • Passive income or loss.
  • Qualified tuition expenses.
  • Rental losses.
  • Student loan interest.
  • The exclusion for adoption expenses.
  • The exclusion for income from U.S. savings bonds.
  • Tuition and fees.

To calculate your modified adjusted gross income, you’ll need your adjusted gross income (AGI) from your tax return. It’s on line 8b of the newly redesigned Form 1040. Then, use Appendix B, Worksheet 2 from IRS Publication 590-A to modify your AGI for Roth IRA purposes.

Excess Contributions: If You Contribute Too Much

It’s good to max out your Roth IRA contributions. But if you go overboard, the IRS will consider it an ineligible (or excess) contribution. Same thing if you make too much money and contribute anyway. These mistakes can be very expensive.

If you contribute too much—or contribute even though your income is too high—you’ll owe a 6% penalty on that amount every year until you fix the mistake.

The good news: There are several ways to fix your mistake:

  • Withdraw the excess contribution (and any earnings on it) before the April tax deadline.
  • If you’ve already filed your tax return, remove the excess contribution (and earnings), and file an amended tax return by the October deadline.
  • Apply the excess to next year’s contribution. You’ll still pay the 6% penalty this year, but you’ll be set going forward.
  • Withdraw the excess next year by Dec. 31. You’ll pay the penalty for two years and then move on.

Of course, it’s best to avoid excess contributions altogether. Be sure to pay attention to the IRS’s contribution limits for the year and watch your income. Incomes fluctuate. Just because you were eligible to contribute last year doesn’t mean you still are.

Note: For the 2019 tax year, you have from Jan. 1, 2019, to April 15, 2020, to make a contribution.

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