A Roth IRA is an effective way for individuals to put money away for their retirement years. Similar to a traditional IRA, Roth IRAs allow investments to grow tax-free while allowing individuals to withdraw the funds they contributed tax-free at any time and any earnings on those contributions once a five-year holding period has passed as long as the individual is 59.5 years old, a first-time home buyer, or disabled. Like other retirement plans offering tax-advantages, the IRS sets several rules, including Roth IRA contribution limits.
- Roth IRA contribution limits for 2019 is $6,000 for individuals under 50 and $7,000 for those over
- Individuals can only contribute earned income to a Roth IRA
- Individuals can make Roth IRA contributions if their income is under a specific amount
- A spouse can contribute to a Roth IRA for a non-working spouse if they are filing taxes jointly
- Individuals can contribute to a Roth IRA regardless of their age
- Roth IRAs don’t have required minimum distributions (RMD)
Roth IRA Contribution Limits
Individuals can contribute $6,000 annually to their Roth IRA. This amount increased in 2019 from the 2018 limit of $5,500. Individuals older than 50 years old can contribute $7,000 annually. This amount is for all IRA accounts, both Roth and traditional.
There are income limits associated with Roth IRAs, with individuals earning higher incomes having their contribution limits reduced during a phase-out period until they become completely ineligible to make Roth IRA contributions.
It is vital that individuals are aware of and follow IRS rules regarding Roth IRA contribution levels as contributions exceeding annual or income limits will likely trigger an IRS penalty.
Eligibility Requirements for a Roth IRA
Having earned an income is the main requirement an individual must meet to contribute to a Roth IRA. Eligible income can happen in one of two ways, first by working for someone who pays them or running their own farm or business. Additional types of income that make individuals eligible to contribute to a Roth IRA include disability benefits, taxable alimony, military differential pay, and nontaxable combat pay.
Investment income from rental property, securities, or other assets along with alimony, child support, unemployment benefits, and Social Security retirement benefits don’t count as earned income and can’t be contributed to a Roth IRA.
There is no age limit for contributing to a Roth IRA, meaning a teenager with a part-time job can create and fund a Roth IRA as well as an individual in their mid-70’s who is still working and earning an income.
Finally, an individual’s ability to participate in another employer-sponsored retirement plan has no bearing on their eligibility to contribute to a Roth IRA.
Roth IRA Income Limits
As mentioned above, the primary eligibility factor for contributing to a Roth IRA is an individual’s overall income as the IRS has established income limits restricting contributions from high earners. Roth IRA income limits are based on an individual’s tax-filing status and modified adjusted gross income (MAGI) to determine eligibility. MAGI is established by adding any deductions, including higher education expenses, self-employment taxes, and student loan interest onto an individual’s adjusted gross income.
Individuals can contribute the entire amount, which for 2019 was $6,000 for individuals under the age of 50 and $7,000 for individuals over if their MAGI is under a specific amount. If an individual’s MAGI is within the Roth IRA phase-out range, they can make partial contributions. However, if their MAGI is over the income limits, individuals aren’t able to make Roth IRA contributions.
Roth IRA Contribution Limits When Married
If married couple Kyle and Jennifer are filing jointly and have a MAGI of $157,000, each earning $78,500 and having a Roth IRA, they can both contribute the maximum amount of $6,000 to their Roth IRAs for a total of $12,000.
Couples having extremely diverse incomes may be tempted to put the name of the higher-earning spouse on a Roth IRA so they can increase how much they can contribute. Sadly, the IRS has rules against individuals having joint Roth IRAs, hence the word individual in the name. However, married couples can still accomplish the goal of contributing higher sums by having both spouses have their own IRA, regardless if they work or not.
To illustrate how this happens, let’s go back to our married couple, Kyle and Jennifer. If Jennifer is the primary wage earner with a salary of $153,000 a year while Kyle manages the home and earns $4,000 each year, Jennifer is able to make contributions to both her IRA and Kyle’s for the full $12,000 annual limit. Each spouse has their own IRA with one spouse funding both.
The only way a spousal IRA situation works is if the married couple is filing a joint tax return with the contributing spouse making enough income to cover both contributions.
Roth IRA Contribution Age Limits
One of the most appealing features of a Roth IRA is there is no age limit like those found with traditional IRAs. This means individuals can continue to contribute to their Roth IRA even after they reach retirement age as long as they are earning an income. Roth IRAs also don’t have required minimum distributions or mandatory withdrawals; in fact, individuals don’t ever need to withdraw the money they have contributed to their Roth IRA, making them attractive estate planning tools.
Timing Your Roth IRA Contributions
Individuals are able to own and contribute to both Roth and traditional IRAs; however, the annual contribution limit applies collectively to any IRA accounts the individual owns. This means if they deposit $1,500 into a traditional IRA, they have $4,500 available to contribute to their Roth IRA.
Roth IRA contributions can be made up to the tax filing day, April 15, 2020, for 2019 contributions. Getting an extension on filing taxes doesn’t give individuals an extension on making IRA contributions. However, those filing their taxes right away in 2020 and receiving a tax refund can apply a portion or all of the refund to their 2019 contribution.
Rollovers from another Roth IRA and conversions from a taxable retirement account such as a traditional IRA or 401(k) plan to a Roth IRA don’t affect the annual contribution limit. Conversions do, however, add to the annual MAGI and may affect an individual’s eligibility to contribute.
Tax Breaks for Roth IRA Contributions
Roth IRA contributions are made from after-tax money, meaning, for the most part, the tax benefits come when withdrawing the money, not when making contributions. However, low- and moderate-income individuals may still be eligible for a 10%-50% tax credit, known as the Saver’s Credit, on Roth IRA contributions. Up to $1,000, this retirement savings credit depends on an individual’s Roth IRA contribution, adjusted gross income (AGI), and filing status. 2019 income limits include:
- $64,000 for married couples filing jointly
- $48,000 for individuals filing as head-of-household
- $32,000 for individuals filing as a single
The credit amount an individual receives depends on their income. For example, if they are filing as a head-of-household, have a 2018 MAGI showing an income of less than $28,875, and contribute a minimum of $2,000 to a Roth IRA, they will receive the maximum 50% credit of $1,000. Use the chart provided by the IRS on IRS Form 8880 to calculate the tax credit percentage.
Record-keeping for Roth IRA Contributions
While individuals don’t have to report their Roth IRA contributions on their federal income tax return, it’s still important for them to keep track of them and keep them with other tax records for each year. This helps them demonstrate they’ve met the five-year holding period required for tax-free distributions from the account.
Roth IRAs are easy to open and offer many of the same advantages as traditional IRAs while providing more flexibility to contributors. While Roth IRAs aren’t tax-deductible, contributing to them provides individuals the opportunity to establish a tax-free savings account, they can either use themselves during retirement or leave to future generations as an inheritance.
Learn more about Roth IRA contribution limits, as well as other helpful investment and trading tips, by scheduling a free online training session with one of Raging Bull’s team of millionaire experts and traders.