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Can Roth IRA Limits Affect Your
Ability to Contribute?

If you are concerned about Roth IRA limits, Question #1 is obviously, “What Roth IRA limits has the IRS imposed?”

Before you make that Roth IRA contribution this year, consider whether there is an age, income or contribution limit that could make a difference to your returns.


As far as Roth IRA limits are concerned, the factors listed below play a role when opening a Roth IRA account:

  • The kind of income you earn
  • Your age
  • How much you earn

So, what rules for these factors will have a bearing on your contribution limits?

Roth IRA limits that influence your contribution

The kind of income you earn makes a difference when it comes to your Roth IRA contribution. Why? Because Uncle Sam, a.k.a. the IRS, differentiates between types of income.

Some types of income are just not eligible. To you, that means only taxable income is eligible for Roth IRA contributions. What is taxable compensation? Publication 590 of the IRS defines taxable compensation as “wages, salaries, tips, professional fees, bonuses and other amounts received for providing personal services. This includes commissions, self-employment income, non-taxable combat pay, and taxable alimony and separate maintenance payments."

Now we come to what taxable income does NOT include – your earnings or profits from property, any deferred compensation, interest and dividend income, pension and annuity income, certain partnership income and other amounts that you eliminate from income. The bottom line is, no taxable income, no Roth IRA.

Let’s look at Roth IRA limits on your age. The simple answer is that there is no age limit. Whether you are five years old or 95, as long as you have taxable income as defined by the IRS, you can make a Roth IRA contribution.

In fact, you don’t need to worry about your age limit even when it comes to the minimum distributions. Unlike a traditional IRA where it is compulsory to take your annual distributions after you are 70 ½, with a Roth IRA there is no such limit. You can continue your Roth IRA contributions for as long as you receive taxable income, and you don’t have to withdraw a single cent, ever, unless you want to.

But wait – you do need to pay attention when you are 59 ½ years old. This is the age when you can make your Roth IRA withdrawals tax-free AND penalty-free, provided your Roth money has been in there for a minimum of five years.

Roth IRA limits on contribution

Your maximum annual Roth IRA contribution is $5,000 if you're less than 50 years old and $6,000 if you're 50 years old or older.

Roth IRA limits on income

How much you earn is the next consideration. You cannot contribute more than what you earn, since Roth IRA contributions must be from taxable income. More than this is illegal.

The IRS publishes income limits taking into account your tax filing status.

You cannot contribute more than these limits.

But there is an interesting twist here - Roth IRA limits on your earnings phase out at some point.

When you reach your maximum income limit, your maximum contribution limit phases out to zero.

So, Roth IRA limits can affect your contribution limits.

Consult an experienced and expert financial advisor to understand how you can get the maximum benefit from your Roth IRA.

I use Zecco to help me fund my Roth IRA account.


Return from Roth IRA Limits to Roth Ira



 



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