Do Roth IRAs Affect Your Adjusted Gross Income?
Roth individual retirement arrangements give taxpayers the option to contribute after-tax dollars to their retirement savings and then, assuming they take qualified distributions, reap the benefits of tax-free distributions during retirement. If you're looking for a way to lower your adjusted gross income in the current year, however, a Roth IRA isn't the way to go.
Contributing to a Roth IRA doesn't change your adjusted gross income, because the contributions are made with after-tax dollars. For example, say your salary is $80,000, you don't qualify for any other above-the-line deductions, and you contribute $5,000 to your Roth IRA. Your adjusted gross income will stay at $80,000 because you can't deduct your Roth IRA contribution.
Qualified Roth IRA Distributions
Qualified distributions from a Roth IRA also don't affect your adjusted gross income because the money comes out tax-free. To take a qualified distribution, you must have had your Roth IRA for at least five tax years and you must be either 59 1/2, permanently disabled or withdrawing no more than $10,000 for purchasing your first home. Once you've met both conditions, you still have to report your Roth IRA distribution on your tax returns, but it won't increase your taxable income.
If you take a non-qualified distribution from a Roth IRA, it might affect your adjusted gross income. If you only withdraw contributions from your Roth IRA, the money isn't taxable, so your adjusted gross income isn't affected. However, if you start taking out earnings, those are considered taxable income, and do increase your adjusted gross income. For example, if you withdrew $15,000 from your Roth IRA, of which $10,000 was contributions and $5,000 was earnings, your adjusted gross income would increase by $5,000.
You do not report your Roth IRA contributions on your income taxes. When you take distributions, you use either Form 1040 or Form 1040A and aggregate your Roth IRA distributions with your traditional IRA distributions. Report the total on either line 11a of Form 1040A or line 15a of Form 1040 and report the taxable portion, if any, on line 11b of Form 1040A or line 15b of Form 1040.
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."