Retirement planning can seem complicated and scary, but with the right plan and a long-term approach, it's something anyone should be able to tackle. It's also one of the most important things.
Roth IRAs are a great way to save for retirement, because they let you set money aside and have it grow tax-free for as long as you leave the money in the retirement account. That sort of tax treatment is hard to find anywhere else, so it's understandable that the government puts limits on how much you can contribute. Those limits are generally $5,500 for both the 2016 and 2017 tax years if you're under age 50, or $6,500 if you're 50 or older. However, there are additional restrictions on how much you can put in a Roth IRA if your income is above certain levels. Below, we'll look more closely at how Roth IRA contribution limits work -- and how some taxpayers can get around them if necessary.
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How a high income can reduce Roth contribution limits for 2017
Some people are prohibited from making full Roth IRA contributions. In particular, if your income exceeds certain limits, then you won't be allowed to contribute the full amounts mentioned above. Those with even higher incomes cannot contribute to a Roth IRA at all.
As a starting point, you'll need to calculate your modified adjusted gross income, or MAGI. This includes all of your income from all sources, though you may deduct any income you've recognized from converting a regular retirement account to a Roth. It also allows for certain other deductions, including educator expenses, health savings account deductions, moving expenses, and early-withdrawal penalties.
Once you've calculated your MAGI, you'll need to compare it to the figures in the following chart.
|
Filing Status |
Contribution Limit Is Reduced if Income Exceeds This Amount |
Contributions Are Prohibited if Income Exceeds This Amount |
|---|---|---|
|
Single, head of household, or married filing separately if you didn't live with your spouse during the year |
$118,000 |
$133,000 |
|
Married filing jointly or qualifying widow(er) |
$186,000 |
$196,000 |
|
Married filing separately if you lived with your spouse at any point during the year |
$0 |
$10,000 |
Data source: IRS.
How much is your Roth contribution limit reduced?
The IRS provides a worksheet that shows you how to calculate your maximum Roth IRA contribution. However, there's a simpler way of thinking about it that can help you get a ballpark figure of what your contribution limit will be.
Notice above that the MAGI range in which Roth contributions get phased out is $15,000 wide for unmarried taxpayers and $10,000 wide for most married taxpayers (other than those who file separately and didn't live together at any point during the year). From that, you can come up with some general rules:
- If you're an unmarried taxpayer under 50, then every $1.50 you earn above the lower threshold will reduce your maximum Roth contribution by $0.55.
- If you're an unmarried taxpayer 50 or older, then every $1.50 you earn above the lower threshold will reduce your maximum Roth contribution by $0.65.
- For married taxpayers, the numbers are similar, except that it takes just $1 in extra MAGI above the lower threshold to reduce the maximum by $0.55 for those under 50 and by $0.65 for those 50 or older.
An example can simplify this. Say you're married, aged 55, and have joint income of $190,000. Looking at the chart above, your income exceeds the $186,000 lower threshold by $4,000. Since you're older than 50, take that $4,000 number and multiply it by $0.65. The result is $2,600. Therefore, your maximum contribution of $6,500 will be reduced by $2,600, bringing it to $3,900.
How to get around Roth IRA income limits
Some taxpayers can use a trick known as a backdoor Roth to get around these limits. Although there are income limits on Roth contributions, there are no limits on Roth conversions. As a result, you can contribute the full annual amount to a traditional IRA and then convert that IRA to a Roth, thereby getting around the income limits.
There are some catches to using this method, however. It works very well if the only IRA you own is the one you use to implement the backdoor Roth strategy. Those who have other IRA assets can run into problems that make the strategy impractical by creating a larger tax bill than is ideal. You'll also have to pay income tax on the funds you convert from a traditional IRA to a Roth (since those contributions were originally made pre-tax).
You can also check with your employer to see if you have an employer-sponsored plan that offers a Roth alternative. Many 401(k)s and similar plans now have Roth options, and unlike Roth IRAs, they typically have no income limits on participation. They also have much higher contribution limits.
In general, knowing the Roth income limits can help you do your tax planning more effectively. That way, if you do have to resort to extraordinary action to save for retirement, you'll have plenty of time to do so.
