Unlike traditional IRAs, Roth IRAs offer tax-free growth and tax-free withdrawals in retirement. These unique tax advantages can lead to significant savings for the investor, making it an attractive retirement savings option. However, not everyone is eligible to contribute to a Roth IRA. In 2023, single filers with adjusted gross incomes (MAGIs) of $153,000 or more cannot contribute to a Roth IRA, while those who are married and file jointly become ineligible once their MAGI reaches $228,000.
A financial advisor can help you plan and save for retirement. Match with up to three fiduciary advisors today.
Am I Eligible for a Roth IRA?
First and foremost, you must have earned income to be eligible for a Roth IRA. Earned income refers to money received for active work, such as salaries, wages, tips and self-employment income. These earnings are a result of your labor. This means that if your primary source of income is from working, you are likely eligible to contribute to a Roth IRA.
But, is there an age limit on Roth IRA contributions? No, the Internal Revenue Service (IRS) allows Roth IRA contributions at any age, as long as you have earned income. This means that even if you’re working well into your 70s, you can still contribute to a Roth IRA.
While there is no age limit for contributing to a Roth IRA, there are income limits for eligibility. These limits are based on your modified adjusted gross income (MAGI). If your MAGI falls within the specified limits, you can contribute the full amount that’s allowed. If your MAGI exceeds the limits, your contribution amount may be reduced or even disallowed completely.
What Income Is Ineligible for a Roth IRA?
However, not all income is considered to be “earned.”
Unearned income, which is ineligible for a Roth IRA, accounts for earnings you receive from passive sources. This includes things like interest, dividends, rental income and capital gains. While unearned income is an important part of your overall financial picture, it doesn’t factor into your Roth IRA eligibility directly.
According to the IRS, unearned income includes:
- Annuity payments
- Ordinary dividends
- Capital gains
- Taxable Social Security benefits
- Unemployment compensation
- Pension income
- Cancellation of debt
- Taxable interest
Understanding these implications is crucial for managing your Roth IRA contributions effectively. If a portion of your income comes from these ineligible sources, it cannot be used to calculate your Roth IRA contribution.
Roth IRA Income Limits
As mentioned earlier, the IRS sets income limits to determine who can contribute to a Roth IRA. If your MAGI exceeds these limits, you cannot contribute to a Roth IRA. The limits for various filing statuses and years are detailed below.
Tax Year 2023
For 2023, the Roth IRA income limits for single filers, heads of household and married couples who file separately but do not live with their spouse during the year are as follows:
- If your modified adjusted gross income (MAGI) is below $138,000, you can contribute the full annual limit to your Roth IRA.
- If your MAGI is $138,000 or higher but less than $153,000, your contribution limit is gradually reduced.
- If your MAGI is $153,000 or higher, you are not eligible to contribute to a Roth IRA.
For married couples filing jointly or qualifying widow(er)s, the income limits are slightly different:
- If your MAGI is less than $218,000, you can contribute the full annual limit to each spouse’s Roth IRA.
- If your MAGI is $218,000 or higher but less than $228,000, your contribution limit is gradually reduced.
- If your MAGI is $228,000 or higher, you are not eligible to contribute to Roth IRAs.
Lastly, married couples who file separately but lived together at any time during 2023 are not eligible to contribute to Roth IRAs if their MAGI is $10,000 or higher.
Tax Year 2022
For 2022, the Roth IRA income limits for single filers, heads of household and married couples who file separately but do not live with their spouse during the year are as follows:
- If your modified adjusted gross income (MAGI) was below $129,000, you can contribute the full annual limit to your Roth IRA.
- If your MAGI was $129,000 or higher but less than $144,000, your contribution limit is gradually reduced.
- If your MAGI was $144,000 or higher, you are not eligible to contribute to a Roth IRA.
For married couples filing jointly or qualifying widow(er)s, the income limits are slightly different:
- If your MAGI was less than $204,000, you can contribute the full annual limit to each spouse’s Roth IRA.
- If your MAGI was $204,000 or higher but less than $214,000, your contribution limit is gradually reduced.
- If your MAGI was $214,000 or higher, you are not eligible to contribute to Roth IRAs.
Lastly, married couples who file separately but lived together at any time during 2022 are not eligible to contribute to Roth IRAs if their MAGI was $10,000 or higher.
Roth IRA Contribution Limits
Roth IRAs are subject to the same contribution limits that apply to traditional IRAs. This annual cap applies to all IRAs, regardless of how many you own.
In 2023, the IRS allows you to contribute up to $6,500 to a Roth IRA. However, savers who are 50 and older can add a $1,000 catch-up contribution for a total contribution of $7,500.
In 2022, the IRS permitted IRA contributions of $6,000 or $7,000 for people 50 and older.
Calculating Your Reduced Contribution
To calculate your reduced contribution limit for a Roth IRA, follow these steps in a clear and straightforward manner:
- Step 1: Depending on your filing status, subtract one of the following amounts from your MAGI: $218,000 if you’re filing a joint return or are a qualifying widow(er); $0 if you’re married filing separately and lived with your spouse at any time during the year; $138,000 for all other individuals.
- Step 2: Divide the result from step 1 by $15,000 (or $10,000 if you are filing a joint return, qualifying widow(er) or married filing separately while living with your spouse at any time during the year.
- Step 3: Take the result from step 2 and multiply it by the maximum contribution limit for Roth IRAs. This is calculated before any reduction for this adjustment and before considering contributions to traditional IRAs.
- Step 4: Subtract the result from step 3 from the maximum contribution limit before making any reductions. This final figure is your reduced contribution limit for your Roth IRA.
For a more hands-on approach to calculating your reduced contribution limit, you can refer to IRS Publication 590-A, titled “Contributions to Individual Retirement Accounts (IRAs).” This publication provides a worksheet that guides you through the steps and ensures accuracy in determining your Roth IRA contribution limit based on your income.
Other Roth IRA Rules
Apart from income and contribution limits, several other rules govern Roth IRA contributions. Understanding these rules is vital to avoid penalties and make the most of your retirement savings.
One such rule involves the timing of contributions. You can make contributions to your Roth IRA at any time during the year. However, contributions for a particular tax year can be made up until the tax filing deadline of the following year.
Another important rule that a financial advisor can help clarify pertains to over-contributions. If you contribute more than the annual limit to your Roth IRA, you could face a 6% excess contribution penalty. This penalty applies for each year the excess remains in the account, if not corrected by the tax filing deadline.
What If My Income Exceeds Roth IRA Limits?
Your income may preclude you from contributing directly to a Roth IRA, but that doesn’t mean you can’t have one. With a strategy known as the backdoor Roth IRA, you can make a non-deductible contribution to a traditional IRA and then convert the account into a Roth. This conversion is where the “backdoor” comes into play.
Keep in mind that you’ll have to pay taxes on the money, but your investments will grow tax-free from that point on. This can be especially valuable if you anticipate being in an even higher tax bracket during retirement.
Bottom Line
Understanding the eligibility requirements and rules for a Roth IRA is crucial for effective retirement planning. With this knowledge, you can take full advantage of the tax-free growth and withdrawal benefits that a Roth IRA offers.
Retirement Planning Tips
- Converting a pre-tax account into a Roth IRA not only offers the potential for tax-free growth and tax-free withdrawals, but it also means your money won’t be subject to required minimum distributions (RMDs). However, be cognizant of the five-year rule, which stipulates that you can’t withdraw money tax-free from a Roth IRA until five years after your first contribution was made.
- Whether you contribute to a Roth IRA or another type of account, a financial advisor can help you save and plan for retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you canhave a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/Kameleon007, ©iStock.com/pixdeluxe, ©iStock.com/katleho Seisa
