The Roth IRA reduction limit is the income level at which your contribution can be reduced or “phased out.” The annual contribution amount for a Roth IRA is determined by your tax filing status and your modified adjusted gross income (MAGI).
How Does the Roth IRA Reduction Limit Work?
The Roth IRA reduction limits are the income levels at which your contribution to a Roth IRA can be reduced or eliminated.
With a Roth IRA, you fund your account with after-tax dollars, meaning there is no tax deduction in the year you contribute. Roth IRAs offer several other useful benefits, including:
- The ability to take tax-free distributions in retirement.
- Your earnings grow tax-free.
- There are no required minimum distributions (RMDs) with a Roth IRA.
- You can withdraw your contributions at any time, including before age 59½. However, you cannot withdraw your earnings without penalty until the account is at least five years old and you are at least 59½.
Roth IRA Contribution Limits
In 2022, you can contribute $6,000 annually and $7,000 if you are age 50 or older. In 2023, you can contribute $6,500, and if you are age 50 or older, you can contribute $7,500.
You can make a contribution for the prior year until April 15 of the following year unless it falls on a weekend or holiday, in which case it is extended. For example, someone contributing for the 2022 tax year has until April 18, 2023, to do so.
Since you need to have a clearer picture of your adjusted MAGI for 2022 by early 2023, you can then contribute up to the limit allowed by the Roth IRA reduction limit for your income.
Roth IRA Income Limits
Roth IRAs are not intended for high-income earners. In 2022, an individual earning $144,000 or more in MAGI, or a married couple filing jointly earning $214,000 or more, cannot contribute to a Roth in the year they reach or exceed those income levels.
In 2023, you can only earn $153,000 as an individual and $228,000 if you are married and filing jointly to be able to contribute to a Roth.
Note: The Roth IRA is designed in such a way that allows for a reduced annual contribution at a point before reaching the applicable limit.
Roth IRA Income Phase-Out Ranges
The IRS rules state that taxpayers can make a partial contribution to a Roth IRA for the year if their income falls within the phase-out ranges.
Year 2022:
- If you are an individual filer, you are not eligible if you earn $144,000 or more, but you can make partial contributions if you earn between $129,000 and $144,000.
- For married taxpayers filing jointly, you cannot contribute if your income exceeds $214,000, but you can make partial contributions if your income is between $204,000 and $214,000.
Year 2023:
- Individual filers cannot contribute to a Roth if they earn $153,000 or more, but they can make partial contributions if their income is between $128,000 and $153,000.
- For married taxpayers filing jointly, you cannot contribute to a Roth if you earn more than $228,000, but you can make partial contributions if your income is between $218,000 and $228,000.
Calculation
Your Eligible Contribution Amount
If your MAGI (Modified Adjusted Gross Income) is within the Roth IRA reduction limits, you need to calculate an amount between $0 and the maximum contribution limit of $6,000 for 2022 (or $6,500 for 2023) that you are eligible to contribute to a Roth IRA.
The process starts by subtracting $204,000 if you are filing jointly or as a qualifying widow/widower, or $129,000 as an individual from your adjusted income in 2022.
Then divide the result by $15,000 for individuals or $10,000 for married/qualifying widow/widower filers.
Multiply the resulting fraction by $6,000 – the maximum contribution for 2022 for individuals under 50 – and subtract the result from $6,000, giving you your partial contribution amount.
Example of Roth IRA Reduction Limit
Let’s say you are a single filer and have an income of $135,000 as your MAGI in 2022. In that year, the Roth IRA reduction limits apply to single filers if they earn $129,000 or more but less than $144,000 annually.
Your Roth IRA reduction limit will be calculated as follows:
- Subtract $129,000 from your income, resulting in $6,000 ($135,000 – $129,000).
- Divide that result by $15,000, giving you the number 0.4 ($6,000 / $15,000).
- Multiply this number by the Roth IRA maximum for individuals under the age of 50 for that year, which is $6,000, resulting in an amount of $2,400 ($6,000 * 0.4).
- Finally, subtract $2,400 from $6,000 to arrive at a result of $3,600, which is the amount you can contribute to a Roth IRA for the 2022 tax year based on your MAGI of $135,000.
What Does This Mean for Individual Filers?
Practically speaking, most people will not fall within the narrow income range where the Roth IRA reduction occurs in most years, but if you’re close, you may want to talk to your tax preparer about optimization strategies.
Note: Contributing to a Health Savings Account (HSA) reduces taxable income and can lower your MAGI below the reduction range.
If you prioritize contributions to a Roth IRA, contributing to an HSA can help you maximize your Roth IRA contribution limit even if you would be in the reduction area otherwise.
An operational takeaway for individual investors is that sometimes your MAGI ends up being higher or lower than you expected after you decided to make Roth IRA contributions earlier.
If you contribute more than the maximum in a given tax year, those contributions incur a 6% excise tax annually, but that additional tax stops accumulating when you withdraw your excess contributions and any income earned on them.
Since calculations from year to year can be tricky, it may be best to wait until you have a complete picture of your compensation and taxes clear at the beginning of the following year. Consulting a tax professional is also advisable if you need assistance in determining your eligibility.
Frequently Asked Questions (FAQs)
What are the Roth IRA reduction limits?
In 2022, if you are a single filer, you cannot contribute to a Roth if you have earned $144,000 or more, but partial contributions are allowed if you have earned between $129,000 and $144,000.
As for …
The maximum income for married taxpayers filing jointly is $214,000, and partial contributions are allowed if your income is between $204,000 and $214,000.
As for 2023, individual taxpayers will not be able to contribute to a Roth if they have earned $153,000 or more, but partial contributions are allowed if their income is between $128,000 and $153,000.
For married taxpayers filing jointly, the maximum income is $228,000, but if your income is between $218,000 and $228,000, you can contribute partial contributions.
What are the contribution limits for Roth IRAs?
In 2022, you can contribute $6,000, and $7,000 if you are age 50 or older. In 2023, you can contribute $6,500, and if you are age 50 or older, you can contribute $7,500.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and keep our content accurate, reliable, and trustworthy.
IRS. “Retirement Topics – Roth IRA Contribution Limits.”
IRS. “Traditional and Roth IRAs.”
IRS. “Retirement Topics – Exceptions to Tax on Early Distributions.”
IRS. “Retirement Topics – Roth IRA Contribution Limits.”
IRS. “Roth IRA Contribution Amounts for 2022.”
IRS. “Roth IRA Contribution Amounts for 2023.”
IRS. “Definition of Adjusted Gross Income.”
IRS. “Reducing AGI this year can help taxpayers when filing taxes next year.”
Source: https://www.thebalancemoney.com/what-is-a-roth-ira-phaseout-limit-5223446
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