Roth IRA Income and Contribution Limits Filing Status 2021 MAGI 2022 MAGI Contribution Limit Married filing jointly (or eligible widow(er)) Less than $198,000 Less than $204,000 $6,000 ($7,000 if age 50 or older) $198,000 to $207,999 $204,000 to $213,999 Begin phasing out $208,000 or more $214,000 or more Not eligible for direct Roth IRA Married filing separately (and you lived with your spouse for the past year) Less than $10,000 Less than $10,000 Start phasing out $10,000 or more $10,000 or more Not eligible for direct Roth IRA Single, householder, or married filing separately (and you have not cohabited with your spouse in the past year) Less than $125,000 Less than $129,000 $6,000 ($7,000 if 50 years or older) $125,000 to $139,999 $129,000 to $143,999 Begin to phase out $140,000 or more $144,000 or more Not eligible for direct Roth IRA.
Married declaration separately and head of household filers can use the limits of the single if they have not lived with their spouse in the past year.
You may get around income limits by converting a traditional IRA into a Roth IRA called a backdoor Roth IRA.
Roth IRA Contribution Limits
Anyone of any age can contribute to a Roth IRA. Still, the annual contribution cannot exceed their earned income. Henry and Henrietta, a married couple filing together, have a $175,000 MAGI. Both make $87,500 a year, and both have Roth IRAs. In 2021, they can each deposit the maximum amount of $6,000 into their account for $12,000.
Couples with widely varying incomes may be tempted to add the name of the highest-earning spouse to a Roth account to increase the amount they can contribute. Unfortunately, IRS rules prevent you from maintaining joint Roth IRAs, so the word “individual” is in the account name. However, you can reach your goal of contributing larger amounts if your spouse sets up their own IRA, whether they work or not.
How can this happen? Let’s go back to our hypothetical couple for illustration. Henrietta is the main breadwinner and earns $170,000 a year, while Henry runs the house and earns $5,000 yearly. Henrietta can contribute to her own IRA and Henry’s up to the maximum of $12,000. In this case, they each have their IRAs, but one spouse is financing them.
A couple must file a joint tax return for the spousal IRA to work, and the contributing partner must have enough earned income to cover both contributions.
Timing Your Roth IRA Contributions
While you can own separate traditional IRAs and Roth IRAs, the dollar cap on annual contributions collectively applies to all of these IRAs. If a person under age 50 deposits $2,500 into one IRA for 2021, then that person can contribute only $3,500 to another tax year.
Contributions to a Roth IRA can be made up to the next year’s tax return. For example, contributions to a Roth IRA for 2021 can be made through April 18, 2022, the filing deadline for income tax returns. Obtaining a tax return deferral does not give you more time to make an annual contribution.
If you are an early bird submitter and have received a tax refund, you can apply some or all of your contribution. You must instruct your Roth IRA administrator or custodian that you want the refund to be used this way.
Conversion to a Roth IRA from a taxable retirement account, such as a 401(k) plan or a traditional IRA, does not affect the contribution limit. However, converting contributes to MAGI and may cause or increase a phasing out of your Roth IRA contribution amount. Also, rollovers from one Roth IRA to another are not considered for making annual contributions.
Tax Benefits for Roth IRA Contributions
The incentive to contribute to a Roth IRA is to build savings for the future — not to get a current tax deduction. Contributions to Roth IRAs are not deductible for the year you make them — they are made up of after-tax money. That’s why you don’t pay tax on the money when you withdraw it – your tax bill has already been paid.
This retirement savings loan is up to $1,000, depending on your filing status, AGI, and Roth IRA contribution. However, you may qualify for a 10% to 50% tax credit on the amount contributed to a Roth IRA. Low- and middle-income taxpayers may be eligible for this tax benefit, known as the Saver’s Credit.
These are the eligibility limits for the savings for the 2021 (and 2022) tax year:
Taxpayers who are married and filing jointly must have an income less than $66,000 ($68,000)
How much credit you get depends on your income. For example, if you are a householder whose AGI shows revenue of $29,625 in the tax year 2021, contributing $2,000 or more to a Roth IRA will generate a $1,000 tax credit, the maximum credit of 50%. The IRS provides a detailed breakdown of the saver’s credit.
The tax credit percentage is calculated using IRS Form 8880.
Roth IRA Withdrawal Rules
Unlike traditional IRAs, there are no required minimum distributions (RMDs) for Roth IRAs. You can withdraw your Roth IRA contributions anytime, for any reason, without paying taxes or penalties.
Withdrawals of income work differently. In general, you can withdraw income without penalties or taxes if you are 59½ or older and have held the account for at least five years. This limitation is known as the five-year rule.
Your withdrawals may be subject to taxes and a 10% penalty, depending on your age and whether you meet the requirements of the five-year rule.
If you meet the five-year rule:
Under 59½: Earnings are subject to taxes and penalties. You may be able to avoid taxes and sentences if you use the money for the first home purchase or if you have permanent disabilities. If you die, your beneficiary may be able to avoid paying taxes on the distribution. 59½ or older: no taxes or penalties.
If you do not meet the five-year rule:
Under 59½: Earnings are subject to taxes and penalties. You may avoid the penalty (but not the taxes) if you use the money for specific purposes. They include the first home purchase, qualified education expenses, unreimbursed medical expenses, and permanent disabilities. If you die, your beneficiary may be able to avoid penalties on the benefit. 59 or older: Income is subject to taxes but no penalties.
Special changes in 2020
In 2020, the coronavirus incentive law (called the Coronavirus Aid, Relief, and Economic Security (CARES) Act) allowed those affected by the coronavirus pandemic hardships of up to $100,000 without the 10% early distribution penalty that people under 59 years old normally guilty.
Account holders also have three years to pay the tax due on withdrawals rather than pay it in the current year. They can repay the withdrawal and avoid tax even if the amount exceeds the annual contribution limit for that tetiretirementount.
Changes to Roth IRA Rules
The Tax Cuts and Jobs Act of 2017 changed the rules for Roth IRAs. Previously, if you transferred another tax-advantaged account (Simplified Employee Retirement (SEP) IRA, Savings Incentive Match Plan for Employees (SIMPLE) IRA, Traditional IRA, 401(k) plan, or 403(b) plan) to a Roth IRA and then from changed your mind, you could undo it in the form of a recharacterization.
No longer. If the conversion occurred after October 15, 2018, it could not be recharacterized into a traditional IRA or back to its original form.
Record Keeping for Roth IRA Contributions
You do not need to report your Roth IRA contribution on your federal income tax return. However, keeping it along with your other tax returns for each year is highly recommended. Doing so demonstrates that you have met the five-year retention period for withdrawing tax-free income distributions from the account.
Each year you contribute a Roth IRA, the custodian or trustee will send you Form 5498, IRA Contribution Information. Box 10 of this form lists your Roth IRA contribution.
What are the rules for depositing money into a Roth Individual Retirement Account (IRA)?
You can contribute partially if your income exceeds the Roth Individual Retirement Account (IRA) phasing-out range. Most income earners qualify for the maximum contribution of $6,000 in 2022, or $7,000 for those over 50. You can’t contribute if your Adjusted Gross Income (MAGI) exceeds the limits.
Can You Contribute to a Roth IRA Anytime?
Yes, you can open a Roth IRA at any age, as long as you have earned income (you cannot contribute more than your earned income). There are also no required minimum distributions (RMDs), so you can leave your Roth IRA to your heirs if you don’t need the money.
What is the five-year rule for Roth IRAs?
The Roth IRA five-year rule states that you cannot withdraw your income tax-free until at least five years after you first contribute to a Roth IRA. This rule applies to anyone contributing to a Roth IRA, whether 59½ or 105 years old.
It comes down to
While not tax-deductible, contributions to a Roth IRA allow you to create a tax-free savings account. You can use this account as a pension or leave it as an inheritance for your heirs. Roth IRAs offer many benefits of regular IRAs but with more flexibility. They work well for people who need tax relief sooner rather than later. Opening one is easy; many excellent Roth IRA providers handle these accounts.
