The individual Roth IRA retirement account is a savings option that offers many more tax benefits than other types of accounts. While it has its advantages, there are income limits for Roth IRAs that you should be aware of.
Income Limits for Contributions to Roth IRAs
The contribution limits for Roth IRAs are not a hard and fast rule. The amounts you can contribute annually phase out over time as income increases. You will first reach a threshold where you cannot contribute the full $6,000 or $7,000. However, you can contribute part of that until your income hits the next threshold. Then you are barred from contributing entirely.
The amount you can contribute to a Roth IRA depends on your marital status, income level, and age (under 50 or older), as outlined in the table below:
Income Phase-Out Limits for Tax Year 2022 Contribution Limit
- Married filing jointly: Up to $204,000 – $6,000/$7,000
- Married filing jointly: From $204,000 up to $214,000 – Contribution phases out
- Married filing separately: $0 – $6,000/$7,000
- Married filing separately: From $0 up to $10,000 – Contribution phases out
- Single filers or head of household: $129,000 – $6,000/$7,000
- Single filers or head of household: From $129,000 up to $144,000 – Contribution phases out
Taxpayers who use the qualifying widow status are treated as married and filing jointly. Those who are married but filing separately are subject to a $10,000 phase-out limit if they do not live with their spouse at any time during the tax year.
Note: The Roth IRA contribution limits are based on your modified adjusted gross income (MAGI). This is your adjusted gross income after adding back certain deductions.
What Investors Need to Know
These income limits are not kind to high-income earners. For example, if you are single, 45 years old, and have a modified adjusted gross income (MAGI) of $200,000 annually, you will not be able to contribute to a Roth IRA at all. However, if your modified adjusted gross income (MAGI) is less than $140,000 annually, you can contribute at least something to a Roth IRA. This places the income within the phase-out range of $129,000 to $144,000 for the 2022 tax year. The IRS provides instructions to help you determine how much you can contribute in this case. Here is a step-by-step process:
- Subtract the income limit for full contributions from your modified adjusted gross income (MAGI). This is the limit where the contribution tapers off. That would be $140,000 (your MAGI in this example) minus $129,000 (the full contribution limit), or $11,000.
- Divide the result ($11,000) by 15,000. This gives you 0.73 or 73%.
- Multiply the contribution limit of $6,000 by this percentage: $6,000 × 0.73 = $4,380.
- Subtract the result ($4,380) from the full contribution limit of $6,000 to determine how much you are allowed to contribute for that tax year: $6,000 – $4,380 = $1,620.
What if I Contributed More Than Allowed to My Roth IRA?
Now, let’s assume you are under 50 and have already contributed $6,000 to your Roth IRA when you realize your limit was $1,620. You have contributed $4,380 more than allowed. You will be subject to a 6% penalty on that amount, or $262.80. This may not seem devastating, but the penalty will apply each year while that excess amount remains in your Roth IRA.
It will be
You have excess contributions if you are aged 50 or older and contributed only $6,000 instead of the limit of $7,000 that includes your catch-up contribution. However, you will still be subject to a 6% tax on any contributions exceeding $7,000 until you remove them.
Note: Excess contributions are subject to a 6% tax annually as long as the excess amounts remain in the account. The tax cannot exceed 6% of the aggregate value of all your accounts at the end of the tax year.
You have some options to correct the situation, but time is critical. You can withdraw the excess contributions before the due date for filing your tax return for the year, which is usually April 15 (or tax day) of the following year. This deadline includes extensions, so you will have until October 15 if you requested more time from the IRS to file your return. You must also withdraw any earnings on those funds.
Your withdrawal will be taxed as ordinary income in the year you make it. You do not necessarily have to take the withdrawal in cash, but it will not affect the tax on the money. You can transfer it to a tax-protected savings or investment account.
If you miss this deadline, you are not completely out of luck. You can deduct that $4,380 from contribution amounts in future years, but the 6% tax will continue to apply until the situation is fully corrected.
Roth IRA Income Limits vs. Traditional IRA Income Limits
There are income limits for Roth IRA accounts when it comes to who can contribute, but not for traditional IRA accounts. The only time the income limits come into play with a traditional IRA is if you want to deduct your contributions from taxes. In this case, income limits apply if you (or your spouse if married) are also covered by a retirement plan at work, or if you are married and filing separately and are covered by a retirement plan at work.
For example, you can claim a tax deduction for your full contribution to your IRA of $6,000 or $7,000 if you are single and do not have a retirement plan at work. The tax deduction is phased out for part of your contribution if your income is over $68,000 but less than $78,000. You cannot claim a tax deduction if you are covered by a retirement plan at work and your modified adjusted gross income (MAGI) is $78,000 or more in tax year 2022.
Note: The tax deduction limits on contributions to an IRA depend on your filing status. Each status has its own limit based on the availability of a workplace plan.
You will lose the tax benefits in a Roth IRA – tax-free withdrawals in retirement and no required minimum distributions – if you instead invest in a traditional IRA. You cannot contribute to a traditional IRA after age 70 and a half, but there is no age limit for contributing to a Roth IRA. Contributions you make to a traditional IRA are tax-deferred in the year you make the contribution, but you will owe taxes to the IRS later in retirement when you withdraw those funds.
Remember that the contribution limits of $6,000 or $7,000 apply collectively to all of your IRA accounts, whether they are Roth or traditional accounts or both. For example, if you have three IRA accounts, you will be limited to contributing $2,000 to each if you are under age 50 or $5,000 to one account and $500 to the others. Just note that total contributions cannot exceed the annual limit.
Questions
Frequently Asked Questions (FAQs)
What are the income limits for contributing to a Roth IRA?
If you are single, you can contribute to a Roth IRA if you earn less than $144,000 in 2022. If you are married and filing jointly, the income limit for contributions to a Roth IRA is $214,000 in 2022. The amount you can contribute depends on your income. If you earn more than the income limit, you will not be able to contribute.
Source: https://www.thebalancemoney.com/roth-ira-income-limits-5225744
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