Roth IRAs are a fantastic tool for retirement and estate planning, but there are rules that limit contributions to them. In 2017, income limits begin phasing out a person's eligibility to contribute to a Roth IRA at $118,000 for singles and $186,000 for couples. Will you be able to take full advantage of a Roth IRA in 2017?

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IMAGE SOURCE: SENIORLIVING.ORG VIA FLICKR.

First, some background

Roth IRAs are similar to traditional IRAs. However, they differ in important ways.

For example, traditional IRAs provide investors with a tax deduction up front, but earnings and contributions are taxed when money is withdrawn. Alternatively, Roth IRAs are funded with after-tax income and thus provide tax savings in the future, when earnings can be withdrawn tax-free.

In 2017, individuals can contribute up to $5,500 for people under age 50, or $6,500 for people age 50 and up, to either a traditional IRA or a Roth IRA. You cannot contribute the full amount to both a traditional and a Roth IRA. However, you can split the amount between the two, as long as the total doesn't exceed the 2017 contribution limit.

Income limits on Roth IRAs

Unfortunately, the ability to contribute to a Roth IRA vanishes if income eclipses set limits. The good news is that those income limits are increasing in 2017 from 2016 by $1,000 per person, or $2,000 per married couple filing jointly.

In 2017, individuals and couples filing jointly start losing their ability to contribute to a Roth IRA at $118,000 and $186,000, respectively. The ability to contribute to a Roth IRA disappears altogether once an individual or couple's income surpasses $133,000 and $196,000, respectively.

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DATA SOURCE: IRS.

These income limits apply to modified adjusted gross income, or MAGI, which is calculated by adding back some tax deductions, such as student loan interest, to the adjusted gross income listed on your Form 1040. In most cases, MAGI and AGI are the same, but if you have a complex tax situation, you'll want to sit down with your accountant.

If your MAGI is between $118,000 and $133,000 if single, or $186,000 and $196,000, if married, then the amount you can contribute to a Roth IRA in 2017 is reduced. Calculating that reduction requires a little math, so let's walk through an example.

If you file individually, and you have $125,000 in MAGI, then you'll subtract $118,000 from $125,000, leaving you with $7,000. Then you divide $7,000 by $15,000, giving you a multiplier of 0.47. Multiply your contribution limit ($5,500 if under 50) by that number and subtract the result from the maximum contribution limit. In this case, $5,500 times 0.47 is $2,567, and $5,500 minus $2,567 results in a maximum contribution of $2,933.

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IMAGE SOURCE: IRS AND AUTHOR.

The calculation is slightly different for married couples filing jointly. 

If you're married filing jointly with $190,000 in MAGI, then it's $190,000 minus $186,000 divided by $10,000, instead of $15,000. For example, a married couple with $190,000 in MAGI would divide $4,000 ($190,000-$186,000) by $10,000, and end up with a 0.4 multiplier. Multiply $5,500 by 0.4, subtract that result from $5,500, and your contribution limit is $3,300.

Tying it together

Contributing to a Roth IRA can increase your financial security in retirement, so everyone should consider its advantages and disadvantages. In most cases, it's pretty cut and dried to know if you can contribute to a Roth IRA. However, if your income puts you in the phase-out zone and your tax situation is complex, then you'll want to sit down with a tax pro to make sure you don't run afoul of the IRS' contribution rules. 

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