Roth IRAs can make it easier to build up retirement savings. By contributing to a Roth, you can have your money grow on a tax-free basis throughout your career and beyond, with no tax due when you take withdrawals in retirement. It's hard to match the Roth's tax benefits, but there are rules about how much you can contribute to a Roth IRA each year. The general Roth contribution limits for 2018 are $5,500 for those younger than 50 or $6,500 if you're 50 or older, which is the same as it was in 2017. However, income limits can reduce or eliminate your ability to put money into a Roth.
What are the income limits for Roth contributions in 2018?
The income limits for 2018 Roth contributions depend on your tax filing status and how much money you make. To start out, you have to figure your modified adjusted gross income. That includes all income but deducts any taxable amount that came from a conversion of a regular IRA or 401(k) to a Roth IRA, as well as deductions on the first page of your tax return such as moving expenses, health savings account deductions, and penalties for early withdrawal on bank CDs.
Once you have that amount, you can look in the chart below to see where you land.
For this filing status:
Contributions are reduced if income is above this amount
Contributions are not available if income exceeds this amount
Single, head of household, or married filing separately IF you didn't live with your spouse during the year
Married filing jointly or qualifying widow or widower
Married filing separately IF you lived with your spouse at any point during the year
Data source: IRS.
What's my maximum Roth contribution?
If your income is less than the first number above or more than the second number, then it's easy to figure out your contribution. Make less than the range, and you can make a full Roth contribution. Make more, and you can't contribute anything.
For those within the range, you can turn to the IRS for assistance through one of its worksheets in the instructions for completing your tax return. But the general idea is that your permissible contribution is prorated. For singles, every $1,500 you make above the bottom end of the range cuts your contribution by 10% of the maximum amount. For married filers, just $1,000 in income results in a 10% cut.
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For instance, say that you're married and older than 50, with joint income of $195,000. Looking at the chart above, your income exceeds the $189,000 lower threshold by $6,000. At a rate of 10% per $1,000, that means that you'll lose 60% of your contribution. For someone older than 50 with a maximum of $6,500, the reduction will be $3,900, leaving you with a final allowable contribution of $2,600.
Can I get money into a Roth another way?
Even if you're limited with Roth contributions, you might still be able to get money into a Roth retirement account. The backdoor Roth involves contributing money to a traditional IRA and then converting that IRA to a Roth. Roth conversions have no income limits, making them available to anyone.
The problem with the backdoor IRA is that it only works well if either you're able to deduct the IRA contribution or you don't have other IRAs with pre-tax money in them. If you can't meet either of those two conditions, then a conversion can increase your tax bill, which is far from ideal.
Another option is to see if your employer-sponsored retirement plan offers a Roth alternative. Many 401(k)s and similar plans have adopted Roth language, and unlike Roth IRAs, Roth 401(k)s typically have no income limits on participation.
Get smart with a Roth
Roth IRAs are great investments, and knowing how income levels can limit your ability to use a Roth can be valuable. Moreover, by considering other ways to get money into a Roth, you can make sure you get the most you can from your tax planning.
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