A Roth IRA provides a great way for you to allow your retirement to grow without worrying about paying taxes on your principal or gains; because contributions are made on an after-tax basis, you can rest assured any future distributions won’t incur taxes. It’s such a good deal that the Internal Revenue Service limits the amount that high-income investors can place in a Roth. If you’re single and earn between $110,000 and $125,000, or married and filing jointly and earn between $173,000 and $183,000, you can only make a partial contribution. If you earn more than those thresholds, you can’t make any contributions to your Roth.
Determine your modified adjusted gross income (MAGI) for Roth purposes by using Worksheet 2-1 in IRS Publication 590. This amount may be different than the AGI you calculated on your 1040, as some additional factors, such as the student-loan-interest deduction, tuition-and-fees deduction, and your IRA deduction, are excluded from your Roth adjusted gross income (AGI).
Subtract the amount where the contribution phase-out begins from your Roth AGI. For individuals, this is $110,000, and married couples filing together, $173,000. If you’re married and file a separate return and lived with your spouse at any time during the year, skip this step. This figure is the difference between your earnings and the full contribution limit. For example, Sheena earned $120,000 this year, so her difference is $10,000.
Divide the difference between your earnings and the full contribution limit by $15,000 if you’re an individual or $10,000 if you’re married, carrying the computation to three decimal places. This is your reduction factor. For example, Sheena’s reduction factor is $10,000/$15,000, or 0.667.
Multiply the contribution limit by your reduction factor. If you’re single, the maximum contribution is 5,000 if you’re younger than 50, or $6,000 if you’re 50 or older. If you’re married, your limit is twice those figures. This figure is the amount you reduce from your maximum contribution. Sheena is 47 years old and single, so her maximum contribution was $5,000, which she multiplies by 0.667. Her reduction amount is $3,335.
Subtract your reduction amount from your maximum contribution amount for your age. This is your reduced contribution limit. Sheena subtracts $3,335 from $5,000 to determine her maximum Roth contribution, which is $1,665 for the year.
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