Is the Max Contribution to a Roth IRA Limited by Earned Income?
- Roth IRAs are limited first and foremost by the IRS maximum allowable contribution. This amount differs from year to year and is generally a bit higher if your are age 50 or older. In 2010, the limit was $5,000 for those under 50 and $6,000 for those 50 and older. The maximum allowable contribution applies to both Roth and traditional IRAs: if you contribute to a traditional IRA, you must subtract that amount from the maximum to find your allowable Roth contribution.
- If your income rises above certain limits, your Roth IRA contributions will be restricted and eventually prohibited. This is known as the modified adjusted gross income phaseout, MAGI limit or modified AGI limit.
In 2010, single tax filers with MAGIs above $120,000 could not contribute to a Roth IRA. Those with MAGIs between $105,000 and $120,000 had their contribution limits reduced, and those with incomes under $105,000 could contribute the full $5,000 or $6,000 maximum allowable contribution.
MAGI limits vary from year to year as they are adjusted with changes in the cost of living. The overall trend has seen them go up rather than down, but there is no guarantee that will continue indefinitely. - Your MAGI begins with your adjusted gross income, calculated on your 1040 form. Add back any deductions you took for traditional IRA contributions, educational expenses, foreign wages and housing allowances, EE bond interest income, reimbursed adoption expenses and domestic production activities. You will also make adjustments for any Roth IRA conversions you completed for the year and any required distributions you took from a traditional IRA.
Use your MAGI to determine a proportionally reduced Roth IRA contribution. Worksheets for both the MAGI and reduced contribution are available in IRS Publication 590: Individual Retirement Arrangements. - Many people estimate their MAGI at the beginning of the year and make IRA contributions accordingly. It is possible that estimates will not be completely accurate. If you get to tax time and discover your MAGI is larger than estimated, you might have excess contributions in your Roth account. Excess contributions are subject to a 6 percent excise tax for each year they are in the IRA, so it is important to make an adjustment for them.
You have two options for excess contributions. You may remove the extra money and any earnings it has generated from the account prior to your tax due date and you will not pay the tax. Alternatively, you may leave the money alone, pay the tax, and apply the excess to your contributions for the next year. - You may also discover that you are financially able to contribute more to your Roth than you had planned. While there is no rule that you must contribute the maximum each year, it is helpful to know you may make prior year contributions to your IRA up until your tax filing deadline. This means that between Jan. 1 and April 15, you may make contributions for both the current calender year and the prior calender year. Specify the year when making the deposit with your IRA custodian to avoid any confusion.