How Much Can You Put in a Roth IRA?

The Internal Revenue Service doesn’t make you pay taxes on money you withdraw from a Roth individual retirement account once it is five years old and you reach age 59 1/2. With such a good tax break, you may want to put as much money as possible into a Roth IRA, even though you can’t deduct contributions. However, the IRS imposes dollar limits on contributions and phases out your allowed contribution amount if your adjusted gross income exceeds annual limits.

Contribution Limits

To make contributions to a Roth IRA, you need earned income equal to or greater than your contributions. As of 2012, the annual limit is $5,000 until you reach age 50, when it goes up to $6,000. Spouses who file a joint return may contribute to separate Roth IRAs even if only one has earned income. This means a married couple can add a combined total of $10,000 to $12,000 per year to their Roth IRAs.

Roth Phase-out

The IRS sets income limits for adding to Roth IRAs. If you are married and file a joint return, the amount you can add starts to decrease when your adjusted gross income equals $173,000, and it is phased out entirely when your AGI reaches $183,000. For taxpayers who are married and file separately, the phase-out range is zero to $10,000. Other taxpayers have phase-out limits of $110,000 to $125,000. These are the 2012 limits. The IRS adjusts phase-out limits each year and puts the latest information on its website.

Calculating Reductions

When your AGI falls between the phase-out limits for your filing status, you must calculate a reduced contribution amount. Subtract the lower limit from your AGI and divide the result by the difference between the lower and upper phase-out limits. Multiply the resulting fraction by your contribution limit, either $5,000 or $6,000. The answer is the reduction in your allowed contribution, so subtract it from the regular contribution limit to find the amount you can still contribute. Suppose you are married and filing jointly with an AGI of $177,000. Subtracting $173,000 leaves $4,000. Divide $4,000 by the $10,000 difference between $173,000 and $183,000 for a result of 0.4. Multiply the normal $5,000 limit by 0.4 to get the amount your contribution limit is reduced. That works out to $2,000, so in this example you can still contribute $3,000.

Conversion

A conversion, also called a rollover, of money from another retirement account such as a traditional IRA or 401(k) is not subject to contribution or income limits. However, all money you put into a Roth must be after-tax funds. Typically the funds in other retirement accounts are pretax money. To convert after-tax dollars, you have to pay ordinary income taxes on the funds.

About the Author

Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.

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