A Roth IRA is a form of tax-benefited retirement account. With Roth IRAs your contributions are not tax deductible, but your eventual withdrawals will be. This makes Roth IRAs a great way to ensure your financial security well into retirement. However, there are many rules about who can contribute and how much they can contribute. Take a look at these key rules:
- Under 50: $6,000
- 50+: $7,000
Modified Adjusted Gross Income Cap
- Single: $137,00
- Joint: $203,000
- After age 59½
- First time home purchase
- Qualified education expenses
How Much Can You Contribute?
The amount you can contribute to your Roth IRA depends on three main things: your income, your filing status, and your age. Under the age of 50, you may contribute up to $6,000 per year, and over 50, you can contribute up to $7,000. Unless you are married filing jointly, the income must be earned. Spouses who have not earned income may contribute if they are married and filing jointly.
In order to figure out how much you may contribute, first calculate your Modified Adjusted Gross Income (MAGI). To do this, take your overall income, minus tax deductions like student loan interest, HSA contributions, and other qualified deductions. If you have your tax return handy, you can find this number on line 37 for 1040, 21 for 1040A, and 4 for 1040-EZ. Then, add back in these certain deductions:
- IRA contributions
- Student loan interest
- Half of your self-employment tax
- Passive income or loss
- Excluded foreign income
- Rental losses
- Tuition fees or expenses
- Interest from EE savings bonds used to pay higher education expenses.
- Adoption expenses
- Losses from a publicly traded partnership
If you did not claim any of these deductions, your MAGI and AGI will be the same. Use the following chart to determine how much you can contribute to your Roth IRA in 2019:
If you are married and filing separately, but lived with your spouse for any part of the year, you are only eligible for reduced contributions if your MAGI is less than $10,000. If your MAGI is in one of the phase-out ranges above, you can find a worksheet for calculating your reduced amount here.
When Can You Withdraw?
Because you already paid taxes on your Roth IRA contributions, you can withdraw these contributions at any time. However, your investment earnings in the account are handled differently. You may face a 10 percent penalty on earnings unless it is a qualified withdrawal. If your account is less than five years old, you may also be subject to additional taxes on earnings in the following circumstances:
- You’re over the age of 59 ½
- You’ve become disabled
- You have died
- The withdrawal is for a first time home purchase, up to $10,000 over your lifetime
- Due to financial hardship, you begin taking substantially equal periodic payments
It’s important to note that Roth IRAs are unique in that they do not require you to start withdrawing funds once you are of retirement age. This means that you have the option to pass on your IRA to your children or heirs.
Frequently Asked Questions
Are contributions to my Roth IRA tax deductible?
It’s important to note that unlike traditional IRAs, contributions are not tax deductible. Their main tax advantage is that their earnings grow tax-free.
Can I still open a Roth IRA if I am over the income limit?
If your income makes you ineligible to contribute directly to a Roth IRA, you can still contribute to one through something called a backdoor IRA. This involves converting a traditional IRA into a Roth IRA. Money moved from a traditional IRA to a Roth IRA must still be taxed, and the conversion may count as income, so you should understand the financial implications of a backdoor IRA before completing one.
What if I am over the contribution limit for a certain year?
The IRS has procedures in place if you end up making more in a year than you expected, or accidentally over-contribute to your Roth IRA to help you avoid the six percent excise tax. You can withdraw the contributions before the annual tax deadline, reclassifying the amount as a traditional IRA contribution, or applying the excess contributions to the future year.
How long can I contribute to a Roth IRA for 2018?
You have until you file your taxes each year to contribute to the previous year’s Roth IRA. This means you have until April 15, 2019 (*due to COVID-19 the 2020 tax date has been pushed back to July 15th, 2020) to contribute to your 2018 Roth IRA.
Can I lose money with a Roth IRA?
Yes. Because Roth IRAs are invested in the market, it is possible that they lose value during an economic downturn.
At what age can I start a Roth IRA?
There are no age minimums for a Roth IRA. This means that even teenagers can invest in them, as long as they have earned income.