Roth IRA Contribution Rules: The Basics

If you work, you may be able to contribute to a Roth IRA. This type of retirement savings account allows you to take tax-free withdrawals of your contributions at any time and tax-free withdrawals of earnings on contributions after a five-year holding period (assuming you are at least 59½, disabled or using them for first-time home-buying expenses). Additionally, there are many excellent Roth IRA providers to open an account with.

The only requirement for contributing to a Roth IRA is having earned income. This is income from a job (including commissions, tips, and taxable fringe benefits) or net earnings from self-employment (i.e., profits). Some types of income are treated as earned income for purposes of Roth IRA contributions: nontaxable combat pay, military differential pay and taxable alimony.

Couples with highly disparate incomes might be tempted to add the higher-earning spouse's name to a Roth account, in order to increase the contribution limits (an annual contribution cannot exceed earned income). Unfortunately, IRS rules prevent you from maintaining joint Roth IRAs. That's why the word "individual" is in the account name. However, you may accomplish your goal of contributing larger sums if your spouse establishes his or her own IRA.

Let's say married, couple Henry and Henrietta filing jointly have modified adjusted gross income (MAGI) of $175,000. Both have Roth IRAs. They can each contribute the maximum $6,000 to their accounts, for a total of $12,000. Also, a spouse who works can contribute to a Roth IRA for a nonworking spouse (assuming sufficient income).

However, your contribution may be limited or barred if your income is too high. Roth IRA contributions are phased out when modified adjusted gross income (MAGI) (essentially adjusted gross income without regard to the foreign earned income exclusion) exceeds a set limit for your tax filing status. These are the limits for 2018 and 2019 (they may be adjusted in the future to account for inflation):

• If you’re married and file jointly or are a qualifying widow(er): full contribution if MAGI is less than $189,000 ($193,000 for 2019); partial contribution for MAGI between $189,000 and $199,000 ($193,000 to $202,999); no contribution if MAGI is $199,000 ($203,000) or more.
• If you’re single, head of household, or married filing separately and you did not live with your spouse at any time during the year: full contribution if MAGI is less than $120,000 ($122,000 for 2019); partial contribution for MAGI between $120,000 and $135,000 ($122,000 and $136,999); no contribution if MAGI is $135,000 ($137,000) or more.
• If you’re married filing separately but lived with your spouse at any time during the year: a partial contribution for MAGI between zero and $10,000; no contribution if MAGI is $10,000 or more.

IRS Publication 590-A provides a worksheet to figure MAGI and the allowable contribution amounts.

There is no age threshold or limit for making Roth IRA contributions. For example, a teenager with a summer job can use the funds for a Roth IRA contribution. Also, someone working after the age of 70½ can continue to make Roth IRA contributions (in contrast to a traditional IRA, which bars contributions after age 70½).

Also, the fact that you participate in a qualified retirement plan has no bearing on eligibility to make Roth IRA contributions. So, if you have the money, you can contribute to a 401(k) plan at work and then contribute to your own Roth IRA.

The maximum contribution for 2018 was $5,500 (or $6,500 if you’re 50 or older by the end of the year). For 2019, the contribution limit rises to $6,000 ($7,000 for the 50+ group). You can also contribute to your account up until tax filing day of the following year.

This dollar limit on annual contributions applies to total IRA contributions (including deemed traditional IRA and Roth IRA set up by an employer as a separate account under a qualified retirement plan). Thus, if you are 45 years old and contribute $3,000 to a traditional IRA, the maximum contribution to a Roth IRA in 2018 was $2,500 ($5,500 – $3,000 traditional IRA contribution). In 2019, you can contribute $3,000 to each account, for a total of $6,000. The contribution limits for both years rise $1,000 for those aged 50 and over.

An annual contribution cannot exceed earned income (and amounts treated as earned income listed above). For example, someone with wages of $4,800 for the year can contribute up to $4,800, regardless of age.

Conversions to a Roth IRA from a taxable retirement account, such as a 401(k) plan or a traditional IRA, have no impact on the contribution limit. However, making a conversion adds to MAGI, and may trigger or increase a phaseout of your Roth IRA contribution amount. Also, rollovers from one Roth IRA to another are not taken into account for purposes of making annual contributions. 

Similarly, repayment of reservist distributions does not limit Roth IRA contributions. Reservist distributions are amounts withdrawn by a member of the Reserves called to active duty after September 11, 2001; these amounts may be re-contributed within two years after the period of active duty ends.

Contributions to a Roth IRA can be made up to the due date of the return for the year to which contributions relate. Thus, contributions to a Roth IRA for 2018 can be made through the April 15, 2019 deadline for filing income tax returns. Obtaining an extension of time to file a tax return does not give you more time to make an annual contribution.

You can make a Roth IRA contribution by directing the IRS to apply some or all of a tax refund for this purpose. To use a 2018 refund to make a 2018 tax-year contribution, you will have to file early enough to ensure that the refund is applied before April 15, 2019. And you will have to instruct your Roth IRA trustee or custodian that you want the refund applied to 2018. You could also use a 2018 refund for a 2019 contribution (instruct the Roth IRA trustee or custodian accordingly).

Contributions to Roth IRAs are not tax deductible. They are made with your after-tax earnings. The incentive for contributing to a Roth IRA is to create tax-free income for the future – not to obtain a current tax deduction.

However, you may be eligible for a tax credit of 10% to 50% on the amount contributed to a Roth IRA. Low- and moderate-income taxpayers may qualify for an additional tax break, called the Saver's Credit. This retirement savings credit is up to $1,000, depending on your filing status, adjusted gross income (AGI) and Roth IRA contribution.

Here are the limits to qualify:

• Taxpayers who are married and filing jointly must have incomes below $63,000 ($64,000 for 2019).
• Head-of-household filers must have incomes below $47,250 ($48,000).
• Single taxpayers must have incomes below $31,500 ($32,000).

The amount of credit you get depends on your income. For example, if you are a head of household whose MAGI in 2018 shows income of no more than $28,500, contributing $2,000 or more to a Roth IRA generates a $1,000 tax credit – the maximum 50% credit. The IRS has a chart that will give you the details.

The tax credit percentage is calculated using IRS Form 8880.

The Tax Cuts and Jobs Act of 2017 made some changes to Roth IRAs. Previously, if you converted another tax-advantaged account (SEP IRA, SIMPLE IRA, traditional IRA, 401(k) plan or 403(b) plan) to a Roth IRA and then changed your mind, you could undo it in the form of a recharacterization. No longer. If the conversion occurred after Oct. 15, 2018, it cannot be recharacterized back into a traditional IRA or whatever it originally was.

You do not have to report your Roth IRA contribution on your federal income tax return. However, it is highly advisable for you to keep track of it. This will help you demonstrate that you’ve met the five-year holding period for taking tax-free distributions of earnings from the account.

Each year that you make a Roth IRA contribution, the custodian or trustee will send you Form 5498, IRA Contributions. Box 10 of this form lists your Roth IRA contribution; keep the form with your tax returns records for each year that you make a Roth IRA contribution.

While not tax-deductible, contributions to a Roth IRA give you the opportunity to create a tax-free savings account that you can use in retirement or leave as an inheritance for your heirs. Offering many of the advantages of regular IRAs, but with more flexibility, it works well for people who are more likely to need tax relief later rather than sooner.