Roth IRA Contributions

What are the IRS rules regarding Roth IRA contributions?

If you plan on contributing to your Roth IRA this year, you need to know those rules or else you risk making an excess or illegal contribution.

So what do you need to know?

Before contributing to your Roth IRA, you need to know your...

• Contribution Limits
• Maximum Allowable Contribution
• Income and Its Effect on the Contribution Phase Out
• Ability to Make Catch Up Contributions
• Deadline for Making a Contribution

You also need to remember that contributions can only be made with after-tax earned income.

That means you need compensation income in order to make a contribution. Social security payments, disability payments, pension benefits, bank interest, and stock dividends do NOT qualify as earned income.

Why?

Because you did not earn those benefits in the current tax year. Instead, compensation income you received in the past resulted in those benefits.

As a general rule, if you offer your labor or brain power in order to provide a product or service for someone else, the compensation you receive qualifies as earned income.

Let's take a look at some of the additional restrictions applicable to Roth contributions...

Contribution Limits

The IRS places strict limits on your annual Roth IRA contributions.

And both your age and your Modified Adjusted Gross Income (MAGI) determine exactly what those limits are.

For instance, as long as you don't exceed the earned income threshold for your tax filing status, you can contribute a maximum of...

• $5,000 if you're under age 50
• $6,000 if you're 50 years old or older

See Income Limits for more information on how your income level impacts your ability to contribute.

Also remember...

You can NOT contribute more money to your Roth IRA than you receive in compensation for the tax year.

For example, let's say you're a teenager in high school. You work a summer job and make $4,000.

Even though most people under the age of 50 are able to make a maximum of $5,000 per year in Roth IRA contributions, you can only contribute $4,000.

Why?

Because you can't contribute more than you earn. In this case, in order to contribute the full $5,000, you need to earn an additional $1,000.

The Maximum Contribution

The maximum contribution anyone can contribute to a Roth IRA is $6,000.

But, of course, not everyone qualifies to contribute this much.

In fact, the maximum contribution varies for each individual.

The determining factors in your maximum contribution are your...

• Age
• Income Level

Assuming you have earned income to contribute, nothing else matters.

Generally speaking, those over the age of 50 can contribute a maximum of $6,000 per year, while those under the age of 50 can contribute a maximum of $5,000 per year. Both of those maximum limits phase out to zero depending on your income range and tax filing status.

Which, of course, means...

Roth IRA Phase Out

Yes, your maximum contribution limit phases out as your income rises.

1) If you're married filing jointly - You can make the maximum contribution until the point at which your combined income equals $169,000. Your maximum contribution hits zero when your combined income hits $179,000. Between $169,000 and $179,000, your contribution limit phases out.

2) If you're single, head of household, or married filing separately (and did NOT live with your spouse for any portion of the tax year) - You can make the maximum contribution until you earn $107,000. Your maximum contribution hits zero when your income rises past $122,000. Between $107,000 and $122,000, your contribution limit phases out.

3) If you're married filing separately (and did live with your spouse for any portion of the tax year) - You can make the maximum contribution as long as you earn $0. However, your maximum contribution amount hits zero once your income exceeds $10,000. Between $0 and $10,000, your contribution limit phases out.

If your income is within the phase out ranges for your tax filing status, then your maximum Roth IRA contribution falls somewhere between $5,000 or zero (if you're under 50) and $6,000 or zero (if you're over 50).

For more specifics on where you stand, please read Roth IRA Phase Out.

Catch Up Contributions

Can you make Roth IRA catch up contributions when you get older?

Yes. In order to help you close the gap between your impending retirement and a sufficient retirement savings nest egg, the IRS allows people over the age of 50 to make an additional $1,000 annual contribution above and beyond the normal maximum applicable contribution.

For instance, let's say you're 52 years old and earn $112,500 per year. A person with the same income level under the age of 50 can make a maximum annual contribution of $2,500.

But since you're over the age of 50, you can make a maximum contribution of $3,500.

The Roth IRA Deadline

What's the deadline for making a Roth IRA contribution?

You can make a contribution for any tax year up until April 15th of the tax year that follows.

Find that hard to follow?

Let's look at an example...

Let's say it's 2011, and you're eligible to make a maximum annual Roth IRA contribution of $5,000. During the course of 2011, you make contributions totaling $4,000. In March 2012, you receive a $1,000 income tax refund...

Can you make a 2011 contribution using your $1,000 refund?

Yes!

As long as you make the contribution by the April 15th 2012 deadline, you can still max out your Roth IRA contribution for the 2011 tax year.

Conclusion

A wide array of rules apply to your Roth IRA contributions, but your ability to contribute depends mostly on how much you earn and how you earn it.

But once you determine you're able to contribute, factors such as age, income level, and the timing of your Roth IRA contribution impact how much you can contribute and in what tax year.

So make sure you understand the contribution rules and how they apply to you.

Additional Information on Roth Contributions

2014 Contribution Limits

What are the 2014 contribution limits? Is it true that income limits for making a Roth IRA contribution disappeared in 2010 and never reappeared? Knowing the facts can save you thousands of dollars and countless of hours of unnecessary aggravation. So take the time to learn the 2014 contribution rules.

2015 Contribution Limits

What are the 2015 contribution limits? They aren't the same as the 2014 contribution limits, so if you haven't looked at IRS Publication 590 in a while, odds are the figures have changed.

2016 Contribution Limits

What are the 2016 Roth IRA contribution limits? While it's still too early to make a contribution, it's never too early to start planning ahead.