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The ability to make a contribution to a Roth IRA retirement account is subject to income limitations. There are income restrictions for full Roth IRA contributions, as well as for partial contributions. However, unlike traditional IRAs, contributions to a Roth IRA don't have a maximum age limit.
The 2016 Roth IRA income limits
Unlike a traditional IRA, the ability to contribute to a Roth IRA depends on your income and filing status. There are two income limits to be aware of. The lower income limit is the maximum modified adjusted gross income (MAGI) to make a full contribution and the upper limit is the threshold above which the ability to contribute disappears altogether.
For the 2016 tax year, here are the Roth IRA income limits:
Data source: IRS
How much can you contribute?
If your MAGI for 2016 is less than the income limitation for a full contribution, you can deposit the maximum allowable amount into your Roth IRA. Currently, this is $5,500 per year unless you're over 50, in which case you're allowed a $1,000 "catch up" contribution for a total of $6,500. Also, your earned income must be equal to or greater than the amount of your contribution.
If your MAGI is greater than the full contribution limit, but less than the overall income limitation, here's the method to determine how much you can contribute:
First, determine how much greater your MAGI is than the full contribution limit. For example, if you're single and have a MAGI of $120,000, this is $4,000 greater than the $116,000 limit to make a full contribution.
Next, divide this amount by $10,000 if you're a married couple filing a joint or separate return (if you lived with your spouse) or are a qualified widow(er), or divide by $15,000 if you use any other filing status.
Finally, multiply this amount by the full contribution amount and subtract the result from the full contribution amount. Using my example of a single taxpayer with a MAGI of $120,000, the calculation would look like this if they are under 50:
- The difference between the MAGI and the limit for a full contribution is $4,000.
- Dividing this amount by $15,000 gives 0.267.
- Multiplying 0.267 by the contribution limit of $5,500 gives $1,468.50.
- Subtracting this from $5,500 gives a reduced contribution limit of $4,031.50.
A few things to note. First, reduced contribution limits are rounded up to the nearest $10, so this would actually translate to a limit of $4,040. Second, the minimum reduced contribution amount is $200. Third, your total contributions to all IRAs cannot be more than the annual contribution limit ($5,500 or $6,500).
Also, keep in mind that while the income limits may be inconvenient for some, a Roth IRA is less restrictive than other types of retirement accounts in different ways. Specifically, there is no maximum age limit to contribute to a Roth IRA as long as you have earned income, and there is no required minimum distribution, no matter how old you get.
What if you make too much money to contribute?
If your income is too high to contribute to a Roth IRA, that doesn't necessarily mean you're out of luck. Fortunately, there's a way to get around the Roth IRA income limits if you earn too much, known as a "backdoor Roth IRA."
Basically, the IRS's rules state that anyone can convert a traditional IRA to a Roth IRA, regardless of income. So, the backdoor way to get a Roth IRA would be to contribute to a traditional IRA, convert the account to a Roth IRA, and simply pay any taxes resulting from the conversion. Doing so is a pretty straightforward process; here's an in-depth discussion about this method if you're interested.
While the ability to contribute directly to a Roth IRA is limited by income, investors who really want the benefits of a Roth IRA can also take advantage -- it'll just require a little extra work.
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