Roth individual retirement accounts were introduced in 1998 to give people the opportunity to save after-tax dollars. Besides the potential for tax-free distributions, Roth IRAs also don't require minimum distributions. However, if you're making too much dough, you won't be able to contribute directly to a Roth IRA because of the income limits.
The Internal Revenue Service restricts who can contribute to a Roth IRA based on your modified adjusted gross income, which for some taxpayers can be significantly different from adjusted gross income. The limits vary based on your filing status, with higher limits for joint filers than for single filers. However, these limits change each year, so check the updated limits in IRS Publication 590 before you contribute.
Calculating Modified Adjusted Gross Income
To figure your modified adjusted gross income, start with your adjusted gross income. Then, subtract any income from conversions to Roth IRAs, whether you're converting from a traditional IRA or employer plan. Finally, add back any amounts you deducted for traditional IRA contributions, student loan interest, tuition and fees, domestic production activities, foreign income or housing, savings bond interest excluded for higher education and employer-provided adoption benefits.
Figuring Limited Contributions
To figure your Roth IRA contribution limit if you're in the phaseout range, you need to know the top and bottom dollar limits and your own modified adjusted gross income. First, subtract your modified adjusted gross income from the top dollar limit in the phaseout range. After, divide the result by the size of the phaseout range. Then, multiply the result by the annual contribution limit. Say your modified adjusted gross income is $122,000, your normal annual contribution limit is $6,000 and your phaseout range runs from $110,000 to $125,000. First, subtract $122,000 from $125,000 to get $3,000. Next, divide $3,000 by $15,000 to get 0.2. Then, multiply 0.2 by $6,000 to find you can contribute up to $1,200 as your maximum Roth IRA contribution.
Alternative Ways to Contribute
If your income is too high to contribute directly to a Roth IRA, you can still get money into a Roth by contributing to a traditional IRA and converting. The IRS does not place an income limit on how much you can make and still convert to a Roth IRA. For example, if you contributed $5,000 to your traditional IRA, claimed a $5,000 deduction and then converted $5,000 to a Roth IRA, you would then include $5,000 of income, offsetting the $5,000 deduction, effectively the same result as contributing straight to a Roth.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."