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Roth IRA Income Limits: The Silver Lining


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If you know a little about IRAs, you probably know that there's a lot to like about Roth IRAs. Not everyone can take full advantage of Roth IRAs, though, because of one little detail: the Roth IRA income limits.

With a traditional IRA, you contribute pre-tax money. Thus your taxable income is reduced -- and with it your taxes in the current year. The money grows in your account and is taxed when you withdraw money from it in retirement. (It's taxed at your ordinary income tax rate at the time, which is often lower than your current rate, as you will no longer be fully employed.)

With a Roth IRA, though, you contribute post-tax money, which grows in the account until you withdraw it in retirement. At that point, you get to take it tax-free. See the key selling point about the Roth now? Imagine contributing $5,000 per year for 15 years and earning an average of 10% on it annually. You'll end up having made $75,000 in contributions into an account worth about $175,000. You'll have $100,000 in gains, and you'll get them all tax-free.

Roth IRA Income Limits
Well, that's how it can work for most people. A little wrinkle is that there are Roth IRA income limits in place, locking some folks out of the Roth and reducing others' ability to take advantage of it. The good news, though, is that this doesn't matter to most of us, as most Americans fall well within the Roth IRA income limits.

Here's the scoop on Roth IRA income limits for 2014: Most folks -- those who fall within the Roth IRA income limits -- can contribute up to $5,500 in total to their IRA(s), with an additional $1,000 "catch-up" contribution allowed for those aged 50 and older. That maximum contribution is reduced, though, beginning at a certain level of modified AGI (adjusted gross income):

 Tax Filing Status

Full contribution allowed if your income is...

You can contribute a reduced amount if your income is...

You cannot contribute to a Roth IRA if your income is...

Married filing jointly or qualifying widow(er)

Less than $181,000

Greater than or equal to $181,000 but less than $191,000

Greater than or equal to $191,000

Married filing separately*

 N/A

Less than $10,000

$10,000 or more

Single, head of household, married filing separately**

Less than $114,000

Greater than or equal to $114,000 but less than $129,000

Greater than or equal to $129,000

*And you lived with your spouse at any time during the year. **And you did not live with your spouse at any time during the year. Source: IRS.gov.

The IRS offers a Web page that explains how you can calculate your exact Roth IRA income limits based on your income.

More on traditional and Roth IRA income limits
If you're wondering whether there's any kind of income limit for traditional IRAs, as for Roth IRAs, the answer is...not exactly. There are instead income-based limits on how much one can deduct for contributions to a traditional IRA. Thus the overall effect is similar to the Roth IRA's income limits, reducing the usefulness of these tax-advantaged retirement accounts. 

Finally, another of the Roth IRA income limits, in a sense, is this: You can only fund a Roth (or traditional) IRA with earned income. So if you're in college and have no earned income, you can't contribute birthday gift money to an IRA.

Those are the Roth IRA income limits in a nutshell. The bottom line is that you probably don't need to worry about them. Still, there's more to learn about Roth IRAs (including ways to get around the Roth IRA income limits), so take some time to get savvier. You can make your retirement more comfortable.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 31, 2014, at 2:05 PM, otherportland wrote:

    I believe you CAN contribute to a Roth IRA even with no (individual) earned income if you are married filing jointly (assuming your spouse has earned income) - subject to usual income limitations.

  • Report this Comment On July 31, 2014, at 2:39 PM, coachtom4 wrote:

    Three other items...

    1) Most 401(k) plans now allow Roth contributions and those do not have income limits.

    2) Most people can convert IRA's to Roth accounts which can be just as valuable - remember that you will need to pay the taxes though

    3) People can do a back door Roth contribution assuming they don't have other IRA's which basically removes the entire income limit conversation. This entails contributing to a "regular IRA" without taking the tax deduction and then immediately transferring it to a Roth. Google it for more info...

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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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