Basic Rules for Regular Contributions

Most people who work for a living (or have a spouse who works for a living) can contribute $3,000 per year to a Roth IRA. That's true even for many people who aren't eligible to make a rollover to a Roth IRA. Those who can't contribute $3,000 fall into two categories: those who don't have enough compensation or alimony income, and those who have too much overall income.

First, the Good News

Before we turn to the actual limit, here are some items that don't affect your contributions.

No Age Limit

There's no age limit for contributions to Roth IRAs. For regular IRAs, you lose the ability to make contributions in the year you turn age 70½. Not so for Roth IRAs. If you meet the other requirements, you can set up a brand new Roth IRA at age 85 and begin saving for your "retirement"!

There's also no lower age limit. A minor can set up a Roth IRA and contribute to it. But remember, young or old, you need to have compensation income, as explained later.

No Employer Plan Limit

Coverage under a retirement plan maintained by your employer does not affect your ability to contribute to a Roth IRA. If you meet the requirements described below, you can contribute to a Roth IRA even if you're covered by an employer plan.

Rollover Doesn't Affect Regular Contribution

The limit on regular contributions to a Roth IRA is entirely independent of whether you made a rollover or conversion. You can make a regular (non-rollover) contribution even if you've already made a qualified rollover contribution.

Contribution to Conversion Roth IRA

Although there was initially some confusion on this point, it's now clear that you can make regular contributions to a conversion Roth IRA.

The Contribution Limit

The basic limit for annual contributions to a Roth IRA (other than rollover contributions) is $3,000 ($4,000 beginning in 2005).* But this limit may be reduced for any of the following reasons:

• You or your spouse may not have enough compensation or alimony income to contribute the full amount.
• Your contribution may be reduced or eliminated because your modified adjusted gross income is too large.
• Your limitation is reduced if you've made certain other contributions.

* Add $500 ($1,000 beginning in 2006) if you're age 50 or older by the end of the year.

Compensation or Alimony Income

For each year you contribute to a Roth IRA, you (or your spouse, if you file jointly) must have compensation or alimony income. If you don't have compensation or alimony income you can't contribute, even if you have other types of income. And if your compensation or alimony income is less than the maximum contribution, the amount you can contribute is reduced.

Compensation Income

Details:  Compensation Income

Compensation income includes amounts you receive from your employer of course, but also includes self-employment income from your own business or from a partnership that generates this type of income. There's a special rule that treats alimony income as compensation income, just for purposes of determining how much you can contribute to an IRA. That means you can contribute to an IRA if you receive taxable alimony payments, even if you don't work for a living. Compensation income does not include investment income, pension income or non-taxable income.

Spousal Roth IRA

Details: Spousal Roth IRA

If you file jointly with a spouse who has compensation income, you don't need compensation income of your own. You can contribute to a Roth IRA based on your spouse's compensation income.

Modified Adjusted Gross Income

For some people the most important limit on contributions to a Roth IRA is based on modified adjusted gross income ("modified AGI," defined below). If this number is too large, your contribution limit may be reduced — possibly all the way to zero.

General Rule

Details: Phase-Out Rules

The income level where the reduction occurs depends on your filing status. You don't have to worry about these rules unless your modified AGI is above the following levels:

Single	$95,000
Married filing jointly	$150,000
Married filing separately, living apart for entire year	$95,000
Married filing separately, other	$0

As your modified AGI rises above those amounts, your contribution amount is gradually reduced or "phased out," and eventually eliminated.

Modified AGI

Details: Modified Adjusted Gross Income

Your adjusted gross income is the amount on your tax return before you claim the standard deduction, any itemized deductions, or the deduction for personal exemptions. Your modified adjusted gross income starts from this number and makes certain changes. You get to subtract any income you report because of converting a regular IRA to a Roth IRA, but you have to add back your regular IRA deduction (if any) and certain tax-exempt amounts.

Exceeding the Limit

Details: Roth IRA Excess Contributions

Some people aren't able to predict their income. You may be wondering what will happen if you contribute $3,000 to a Roth IRA early in the year and later learn you don't qualify for that contribution because your modified AGI is larger than you expected. In this situation you can avoid penalties if you take corrective action by the due date (including extensions) of your return for the year of the contribution.

Reduction for Other Contributions

The amount you can contribute to a Roth IRA is reduced for certain other contributions:

• Contributions you make to a regular IRA (other than rollover contributions).
• Contributions you make to a "501(c)(18) plan." These are pension plans created before June 25, 1959 that are funded entirely with employee contributions.

Your Roth IRA contribution is not reduced or otherwise affected by any contribution you make to a 401k plan or 403b plan. (Technically these amounts are contributed by your employer, not by you.)

Q: What if I contribute to a SEP IRA or SIMPLE IRA?

A: Typically these contributions are "elective deferrals," which don't reduce your eligibility to contribute to a Roth IRA (or a traditional IRA). Just like the dollars that go into a 401k plan, they're considered to be contributed by your employer. But you're permitted to make a  regular "IRA-type" contribution to a SEP IRA (limited to $3,000, like any other IRA contribution). If you make this type of contribution to a SEP IRA, it reduces the amount you can contribute to a Roth IRA.

by Kaye Thomas, author, Tax Guide for Investors
Updated December 27, 2004