Do I Qualify for a Roth IRA?

By Matthew Frankel Markets Fool.com

There are no age restrictions to qualify for a Roth IRA contribution, but your modified adjusted gross income (MAGI) must be below a certain threshold. Roth IRAs have several advantages in addition to the tax benefits, so here's how to find your Roth contribution limit -- as well as a way to get around the limit if you don't qualify.

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The advantages of a Roth IRA

The most obvious reason to use a Roth IRA, or any IRA for that matter, is the tax benefits. Here's a quick discussion of the differences between traditional and Roth IRAs, but the basic idea is that while Roth contributions are not tax-deductible, qualified withdrawals from a Roth IRA are 100% tax-free, no matter how much your investments grow over the years.

Image source: Getty Images.

In addition, there are a few other advantages to using a Roth IRA that are important to know:

  • Roth IRA contributions, but not investment profits, can be withdrawn without penalty at any time, for any reason. This feature makes a Roth IRA a good option if you don't necessarily want all of your money tied up until you're 59 1/2 years old.
  • Unlike traditional IRAs, Roth IRAs have no minimum distribution requirement after age 70 1/2. You can leave your money alone for as long as you'd like.
  • Similarly, there is no maximum age to contribute to a Roth IRA. As long as you have earned income, you can put some of it into a Roth IRA.

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Income qualifications for a Roth IRA

Since Roth IRAs are intended to help middle-class Americans save for retirement, there is an income restriction. In order to be eligible to contribute to a Roth IRA, your modified adjusted gross incomemust be under the thresholds set annually by the IRS. For the 2017 tax year, here are the Roth IRA income limits for various filing statuses:

Metric

Married Filing Jointly, Qualified Widow(er)

Married Filing Separately (Lived With Spouse)

Single, Head of Household, Married Filing Separately (Living Separately)

Full contribution MAGI limit

Less than $186,000

$0

Less than $118,000

Partial contribution MAGI range

$186,000-$195,999

$0-$9,999

$118,000-$132,999

No contribution

$196,000 and above

$10,000 and above

$133,000 and above

Data source: IRS.

If you fall into the "partial contribution" range, you can still make a contribution to a Roth IRA; however, you are limited to less than the overall IRA maximum of $5,500 or $6,500. Here's a five-step procedure for determining your maximum Roth contribution for 2017 if you fall in the middle of the income thresholds:

  1. Find your modified adjusted gross income. Since you don't know your 2017 MAGI yet, it's reasonable to use your 2016 MAGI from your tax return to estimate it, as long as your income hasn't changed significantly.
  2. Subtract $186,000 if you're married filing jointly, $0 if married filing separately, or $118,000 for all other filing statuses.
  3. Divide by $15,000, or $10,000 if filing a joint return, as a qualified widow(er), or if married filing separately and you lived with your spouse at any time during the tax year.
  4. Multiply this amount by your maximum contribution limit. This is either $5,500 or $6,500, depending on whether you're under 50, or 50 or older.
  5. Subtract this amount from the maximum contribution limit to find your reduced limit.

If you don't qualify, there's another way

If your MAGI is above the maximum income limit for your filing status, you don't qualify to contribute directly to a Roth IRA. However, there's a way to contribute indirectly that anyone can take advantage of, which is informally known as the "backdoor" method.

Basically, there's an IRS rule that says that anyone can convert a traditional IRA to a Roth IRA, regardless of their income. For existing traditional IRAs, there can be some pretty big tax implications of doing this, but if you contribute to a traditional IRA and immediately convert the account to a Roth IRA, there won't be any tax issues to worry about. Additionally, converting an IRA is a relatively painless procedure -- you can read a step-by-step guide here.

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