Roth individual retirement accounts (IRAs) let you save money on an after-tax basis -- no deduction for contributions, but your distributions in retirement come out tax-free. Though you can set your savings goals however you want, such as a particular percent of your income, the Internal Revenue Service sets your maximum Roth IRA contribution in dollars.
Roth Contribution Limits
Roth IRAs have a dollar amount limitation on how much you can put in. Though the IRS might not be what comes to mind when you think of groups that keep up with the times, your Roth IRA contribution does just that. Every year, the IRS adjusts the maximum contribution you can make to keep pace with inflation. For example, in 2013, the IRS bumped up the maximum annual contribution from $5,000 per year to $5,500 per year. When you reach age 50, you get to make an additional catch-up contribution that increases your limit. For example, in 2013, folks 50 and up can deposit $6,500 instead of $5,500 per year.
If your compensation is less than your contribution limit, you can put 100 percent of it in your Roth IRA, but no more. See, the IRS caps your annual contribution at the smaller of your compensation or standard contribution limit. So, if you don't have enough compensation, your contribution limit falls. Your compensation only counts your income from working or taxable alimony you received during the year. For example, if you weren't working for most of the year and only made $2,500, you can't put in more than $2,500 even though the annual contribution limit is higher.
If your modified adjusted gross income is too high, you can't contribute any percentage of your income to your Roth IRA because you're ineligible. Unlike compensation, your modified adjusted gross income includes all your taxable income, such as interest or capital gains, except any income from Roth IRA conversions. For example, in 2013 if you're married filing jointly, your maximum Roth IRA contribution starts dropping when your MAGI crosses the $178,000 threshold and disappears completely when you hit $188,000.
Traditional IRA Contributions
If you're making contributions, you're cutting down on the maximum Roth IRA contribution you can make for the year as well. Since the limit for both Roth IRAs and traditional IRAs is cumulative, you can't max out both accounts every year. For example, if you deposit $3,500 in your traditional IRA when your contribution limit is $5,500, you only have $2,000 left in your limit to put in your Roth IRA.
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