The Income Limits for Investing in a Roth IRA

Contributing to a Roth IRA when you make too much results in tax penalties.

tax forms image by Chad McDermott from

Roth individual retirement arrangements give you the advantage of saving money in a tax-sheltered account and then taking tax-free qualified distributions. However, not everyone is eligible to invest in a Roth IRA each year. If you don't qualify this year, check again next year because eligibility can change from year to year.

Income Limits

The tax code limits your ability to contribute to a Roth IRA based on your modified adjusted gross income for the year. Your modified adjusted gross income equals your adjusted gross income plus several tax deductions, such as the student loan interest deduction. If you make too much, you aren't able to contribute to an IRA for the year. The income limits vary depending on your filing status. The IRS publishes the new limits each year in Publication 590.

Phaseout Range

The income limits for contributing to a Roth IRA aren't an all-or-nothing proposition. Instead, the limits have a phaseout range. If your modified adjusted gross income falls in the phaseout range, your Roth IRA contribution limit decreases. For example, if you're right in the middle of the phaseout range for your filing status, your contribution limit for a Roth IRA is half as much as it otherwise would be.

Minimum Compensation

The IRS also sets a minimum income limit for contributing to a Roth IRA: you must have at least as much compensation for the year as your Roth IRA contribution. Compensation differs from income because compensation includes the pay for work you do, such as self-employment income and salary. If you don't have any compensation for the year, even if you have other income, you can't contribute to a Roth IRA.

Excess Contributions

If you're ineligible to contribute to a Roth IRA but you try to put money in anyway, you've made an excess contribution. If you don't correct the excess contribution by your tax filing deadline, you'll owe a 6 percent penalty on the excess contribution and it will continue each year until you correct the excess. To correct the excess, you have to withdraw both the excess contribution and any earnings on the excess contribution.