Roth Contribution Limits: Everything You Need to Know
A Roth contribution limit is the amount of money that you can contribute to the fund so it can continue to grow.8 min read
What are Roth Contribution Limits?
A Roth contribution limit is the amount of money that you can contribute to the fund so it can continue to grow. As your income gets higher, the amount you can contribute may be reduced and eventually, once your income level reaches a certain point, will be eliminated.
The Roth contribution limits are based on your modified adjusted gross income, and the fine print on a Roth IRA informs you that you may not contribute more than your taxable contribution for the year.
An example would be a contributor whose taxable income is $3,000 would be given a cap on their contributions to their Roth IRA of $3,000 as well. Additionally, if you do not have any taxable income during the year, you are not allowed to make contributions.
The only exception to the taxable income rule is in the case of a spousal IRA, which allows a spouse that does not work to contribute to an IRA using the taxable income base of the working spouse. To be eligible for this exception the couple must file a joint return, and the working spouse's income will set the limit for both spouses' contributions.
Roth IRA Threshold Limits
To make direct Roth IRA contribution, your modified adjusted gross income must be lower than a certain level. While this is the standard, you can work around this requirement by using a back door IRA.
There are income threshold limits that will begin to reduce the amount of contribution, and eventually phase out the ability to make any amount of contribution. For taxpayers who file a joint tax return, the income level for reduction starts at $118,000 for their annual modified income. The threshold ends at $133,000, which is when contribution limits will eventually reach zero.
If you are a tax filer that lists your return as married filing jointly status or qualified widower, your income threshold will start at $186,000 modified gross income, and end at $196,000.
Contribution Limits Stay the Same
For those who are over 50, the contribution limit for a Roth IRA or traditional IRA remains unchanged with a contribution limit of $5,500. Contributors over the age of 50 can contribute an additional $1,000 increasing the total contribution limit to $6,500. This additional $1,000 is allowed so that contributor's over 50 are able to play catch up to have enough money for their retirement.
Roth IRA Contribution Limits for Individuals Under 50
The $5,500 maximum annual contribution level for individuals who are under 50 years to contribute to their IRAs is $5,500. It is important to note that the $5,500 is the maximum contribution amount that you can contribute to all of your IRA accounts, both Roth and traditional.
For example, you could contribute $2,500 to your Roth IRA and contribute the remaining limit of $3,000 to your second IRA provider. You could not contribute $5,500 to both accounts.
Reducing Roth Contribution Limits for 2017
If your income exceeds a certain limit, you will be forbidden from making complete Roth IRA contributions. While some incomes simply reduced the amount that can be contributed, higher incomes can eliminate the ability to contribute altogether.
To determine whether your income will, or will not, affect your ability to contribute, you will need to start by calculating your MAGI, or Modified Adjusted Gross Income. This will include income from all sources although you will be allowed to reduce the amount through some deduction such as income that came from converting a normal retirement account to a Roth. Other deductions that can lower your MAGI include:
- Educator expenses
- Moving expenses
- Early withdrawal penalty
- Health savings account expenses
The contribution limits begin to reduce at certain Modified Adjusted Gross Income levels depending on your filing status.
- Head of household, single, or married filing separately and not residing with your spouse – $118,000 for reduction, $133,000 for prohibiting
- Married filing together or qualifying widower – $186,000 for reduction, $196,000 for prohibiting
- Married filing disjointedly if you lived with your spouse at any time during the year – $0 for reducing, $10,000 for prohibiting
Roth Contribution Limit: How Much Is It Reduced?
To determine how much your income will reduce your Roth IRA contribution limits, the IRS offers a worksheet for you to perform the calculation.
There is a simple way to compute your maximum Roth IRA contribution based on your Modified Gross Adjusted Income. Begin by knowing the income threshold limit that begins reduction, and your modified gross adjusted income for the year.
For unmarried taxpayers who are under the age of 50, you can calculate by taking every $1.50 that you earn above the lower end of the threshold limit, and then reduce your maximum contribution limit by $0.55. For example, if you are filing as single and make a MAGI for the year of $120,000, you would subtract $118,000 from the $120,000 and then divide that by $1.50 which will give you $1,333.33. Next multiple this amount by $0.55 and you will see that your contribution will be reduced by $733.33.
For taxpayers that are unmarried and over 50 years of age, the same calculations will be made but instead of reducing your contribution by $0.55 for every $1.50 you will reduce it by $0.65.
Married taxpayers will calculate a reduction of $0.55 for each $1 of MAGI they earn over the threshold, while those married over 50 will calculate $0.65 for every $1 over the limit.
Additional Roth IRA Contribution Information
You can contribute money into your Roth IRA account from January 1 of your current tax year until April 15 of the following tax year. The money that you contribute to a Roth IRA is made with post-tax dollars, so you will not be required to pay taxes on withdrawals made during retirement.
Should You Be Contributing a Reduced Amount?
To ensure that you have enough money to sustain retirement, it is recommended that you continue to contribute to your IRA even if the contribution amount is reduced by your income. With a Roth IRA, your contributions are made after taxes, which will allow you to remove the fund's amount tax-free when it comes time to withdraw. If you follow the Roth IRA outlined rules you will not have to pay taxes on the investment growth.
The contributions can also be valuable during your retirement to help keep your taxable income lower. As traditional IRAs will be counted as income to be taxed, your withdrawals form your Roth will not be, so you will be able to have more income without pushing yourself into a higher tax bracket.
What to Do if You Contribute Too Much to a Roth IRA
It is important to be cautious when reaching the threshold that will require your contribution limits to be reduced. If you exceed the annual limit for your contributions, you will be assessed a penalty from the IRS that could wipe out any investment income earned.
You can correct the mistake if you catch the over contribution before filing your tax return by withdrawing the amount that you exceeded by and the earnings that you gained before filing your tax return.
If you noticed your mistake after your return has been filed, you are allowed to remove the excess amount and earnings within six months of filing your return and then file an amended return.
In both cases, you will avoid the penalty and only be required to pay the taxes on the earnings. You can also reduce your next year's contributions by the amount you over contributed, but you will incur a penalty of 6% for each year it stays in the account. To avoid this issue, maintain your records and contact a tax advisor if you are unsure.
How to Avoid Roth IRA Income Limits
To get around the contribution income limits, many tax payers have used a trick that is often referred to as a back door Roth. The back door operates on the premise that although there's limits on Roth contributions, there aren't any limits on Roth conversions.
To utilize this method, you will need to fund the full possible annual amount to your traditional IRA and then convert that IRA to a Roth. This will allow you to circumvent the Roth IRA contribution limits and contribute more for the year.
For this strategy to work, you will only be able to have the IRA that you will be using for the back door strategy. If you have other IRA assets, this trick is not recommended as you could run into problems that end up leaving you with a larger tax bill. Additionally, the payer may end up paying additional income tax on the funds that have been converted from the traditional IRA to the Roth as the contribution originally made would have been tax-free.
Knowing your Roth IRA contribution limits and planning ahead for your retirement can give you plenty of time to save without having to find extraordinary ways to increase your contributions.
Traditional IRA Deduction Limits for 2017
In addition to contribution limits, there are limits imposed on deductions that can vary from year to year. This deduction will be determined based on your tax filing status, as well as the amount contained in your retirement account. The deduction limits for 2017 are as follows:
- For qualifying widowers or those married filing jointly that are covered by a work related retirement plan that is less than $99,000 and your spouse is covered less than $186,000, you will qualify for the full deduction limit.
- For those who are married filing jointly or a qualified widower with a workplace retirement account that falls between $99,000 and $118,999 and your spouse's falls between $186,000 and $195,999, you will be able to take a partial reduction.
- A qualified widower or those who file married filing jointly with a workplace retirement plan that exceeds $119,000 and a spouse's that exceeds $196,000, there will be no deduction.
For those who file as single or head of household, the deduction limits include:
- Full deduction for those with an income less than $62,000
- Partial deduction for those with an income that falls between $62,000 and $72,000
- No deduction for those with an income of $72,000 or more
Those who are married but file separately and have a spouse that has a retirement plan less than $10,000, you will get a partial deduction. Those whose spouse's plan is more than $10,000 will receive no deduction.
With so many regulations, taxes, limits, and risk of penalties, retirement planning can be scary for many individuals. By making an effective plan and taking a more long-term approach with contributions being made early, retirement planning can be easily managed. While it may seem complicated, it is also an important part of life planning, and should be addressed as early in your career as possible.
One reason Roth IRAs have become a popular form of investment is that it allows you to put aside your money for retirement, and allows it to grow tax-free as long as it is in the account for retirement. You already have paid taxes on the investment portion, so you will be allowed to remove the money tax-free as well if you wait until the appropriate time in retirement to begin withdrawing.
It is this tax-free advantage that causes the government to put contribution limits in place, but other forms of tax-free investments are hard to find.
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