Roth individual retirement accounts (IRAs) are more flexible than other retirement accounts in many respects, including early withdrawals. However, contributing to a Roth account requires earning income.
Roth Accounts Require Earned Income
You must have taxable earned compensation to contribute to a Roth account, just like a traditional retirement account.
There are no age restrictions on when you can contribute to any type of account starting in 2023. You can contribute to a Roth account if you are a teenager earning taxable income or if you are seventy-seven and still earning taxable income and reporting it. As long as you have taxable income according to IRS limits, you are eligible to contribute, with one exception. Your spouse can contribute the maximum allowed for you if you do not have personal income.
Note: The IRS has a limit on modified adjusted gross income (MAGI) to qualify for contributing to a Roth account. You may not be able to contribute the maximum if your earnings exceed a certain threshold, or you may not qualify to contribute at all if you earn more than the maximum income limit.
What Is Considered Earned Income?
The most common forms of earned income are compensation earned from working for an employer or net earnings from self-employment. Other sources of income can be used to fund a Roth account, including:
- Taxable alimony or other maintenance received under a divorce decree
- Non-taxable combat pay
- Some other taxable payments not related to scholarships
Compensation does not include earnings from rental properties or other real estate. It also does not include pension or annuity payments, or profits from a partnership that does not provide services that generate income.
Roth Contribution Limits
There are no income limits for eligibility to contribute to a traditional retirement account, but the amount you can contribute to a Roth account decreases when your modified adjusted gross income (MAGI) reaches certain levels. Eligibility is completely phased out above a certain threshold.
The IRS regularly adjusts the modified adjusted gross income (MAGI) limits and contribution limits to keep up with inflation. The following table summarizes Roth account eligibility and contribution limits for 2023 based on your tax filing status.
| Filing Status | 2023 Modified Adjusted Gross Income | 2023 Contribution Limits |
|---|---|---|
| Single, Head of Household, Married Filing Separately (and did not live with spouse at any time during the year) | Less than $138,000 | $6,500 ($7,500 if you are age 50 or older) or your modified adjusted income, whichever is less |
| At least $138,000 but less than $153,000 | Reduced contribution limit | |
| $153,000 or more | Not eligible to contribute | |
| Married Filing Separately and lived with spouse at any time during the tax year | Less than $10,000 | Reduced contribution limit |
| $10,000 or more | Not eligible to contribute | |
| Married Filing Jointly or Qualifying Widow(er) | Less than $218,000 | $6,000 ($7,000 if you are age 50 or older) or your modified adjusted income, whichever is less |
| At least $218,000 but less than $228,000 | Reduced contribution limit | |
| $228,000 or more | Not eligible to contribute |
Those not eligible to contribute to a Roth account have other options for receiving tax benefits from retirement accounts. These options include traditional retirement accounts or retirement savings plans offered by employers such as 401(k) plans.
Taxpayers earning money from self-employment or side jobs can set up a Simplified Employee Pension (SEP-IRA) even if they also work for an employer and participate in a 401(k) plan.
Note:
You can also consider a strategy known as “backdoor Roth IRA” if your income exceeds the limit to contribute to a Roth IRA but you want to take advantage of the tax benefits it offers. This involves contributing to a traditional retirement account and then converting those funds to a Roth IRA.
You will have to pay taxes on the taxable funds converted to the backdoor Roth IRA, but the money then grows tax-free and you will benefit from the tax-free distribution advantages that the Roth account provides.
There are no required minimum distributions after converting funds from a traditional retirement account to a Roth IRA.
Exception: Spousal Roth IRA
There is an exception to the rule requiring you to have earned income to contribute to an account for couples filing joint tax returns. The spousal Roth IRA allows the working spouse to fund a Roth IRA for the non-working spouse.
The working spouse can contribute the maximum allowed for themselves as well as the maximum allowed for their spouse. Married couples who meet the income limit requirements can contribute up to $13,000 annually as of 2023 ($6,500 each) or $15,000 if they are 50 years old or older and have that amount as earned income.
Andrew Crowell, Vice President of Wealth Management at D.A. Davidson, a brokerage firm, said in a phone interview with The Balance that spousal Roth IRAs and backdoor Roth strategies are widely used by the firm’s clients. Crowell also noted that conversions are popular too, as Roth accounts provide tax-free distributions and are not subject to required minimum distributions at age 72.
Can you contribute to a Roth IRA?
You can contribute less than $6,500 (or $7,500 if you are 50 years old or older) or the total amount you earned for the year, whichever is less, if you have earned income for the current tax year that does not exceed the income limits.
The Internal Revenue Service (IRS) provides a worksheet to help you determine the amount you can contribute to a Roth IRA if your earnings exceed the allowable limits for the maximum contribution.
Frequently Asked Questions
Can I convert part of a traditional retirement account to a Roth IRA if I don’t have earned income?
You can convert all or part of a traditional retirement account to a Roth IRA, regardless of income. You will be required to pay taxes on the amount converted from the traditional retirement account. It is recommended to consult with a tax professional before converting the funds.
Does it matter when I earned the income?
You must have earned income for the same tax year that you contribute to a Roth IRA. You can contribute for a specific tax year up until the tax return deadline for that year, which is typically in mid-April on Tax Day of the following year.
What happens if I contribute to a Roth IRA without earned income?
That is considered an excess contribution, and the IRS will impose a 6% annual penalty until the amount is corrected. The excess can be withdrawn or carried forward to the next tax year if you have already filed your tax return for the year. Remember that the spousal Roth IRA allows the working spouse to contribute to a Roth IRA for the non-working spouse as long as all other eligibility requirements are met.
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This article was updated on February 21, 2023, to correct the earned income requirements and age limits for contributions to traditional retirement accounts and Roth IRAs.
Source:
https://www.thebalancemoney.com/do-i-need-earned-income-for-roth-ira-contributions-5270446
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