Am I eligible for a Roth IRA? Which rules pertaining to the ownership of Roth IRAs must I be aware of? What are my options if I don’t qualify for this type of individual retirement account? If you have been looking for the answers to these questions, then this post will help you understand all you need to understand. All you need to do is read on till the end of the article to find out more.
Roth Individual Retirement Accounts, or Roth IRAs as they are popularly referred to, are well-known retirement savings vehicles that provide tax advantages to those who utilize them. Simply put, these accounts are funded using after-tax dollars. As much as there is no immediate tax break, the account owner also benefits by having not to pay taxes during their retirement years when taking withdrawals.
Some of the main benefits of Roth IRAs over the also popular traditional IRA include:
- You are allowed to take tax-free qualified distributions
- The ability to withdraw your preferred amount of the contributions made without incurring any penalties.
- Roth IRAs do not have the Required Minimum Distribution (RMDs) requirement. Traditional IRA owners are required to start taking RMDs upon hitting 72 years.
Do you, however, qualify for a Roth IRA, or do the current rules and regulations pertaining to the ownership of these IRAs disqualify you? Read on to find out.
The Income Limitations for holding a Roth IRA
According to the IRS, any individual with an earned income can open a Roth IRA. Common forms of earned income include:
- Compensation from an employer
- Earnings made by an individual who is self-employed.
Other types of income that you can use to fund your Roth IRA include:
- Taxable alimony as well as other amounts of money received by order of a divorce decree.
- Any form of nontaxable combat pay
- Specific types of taxable non-tuition and stipend payments
The IRS rules state that money that is not considered compensation cannot be used to fund a Roth IRA. Some types of this money include:
- Profits and earnings from rental income.
- Income from pension schemes and annuities.
- Deferred compensation
- Unemployment benefits
- Non-taxable alimony.
You are allowed to contribute to your employer-sponsored retirement plan such as a 401(k) and also open a Roth IRA, provided that you meet all requirements set by the IRS.
Roth IRA Income Limits
Just because you have an earned income does not mean that you will automatically be granted permission to open a Roth IRA. The IRS has to check whether your income falls within the set income limits requirements, as stipulated in the Taxpayer Relief Act of 1997. Lawmakers set these income limits to see to it that high-earning individuals do not create Roth IRAs to use as tax shelters.
You can open a traditional IRA and start making contributions, regardless of your income level. With a Roth IRA, however, the IRS requires that your Modified Adjusted Gross Income (MAGI0, fall within the set limits, for you to qualify to open an account.
The eligibility to open and contribute to Roth IRAs is usually based on household income. The IRS makes routine adjustments to the MAGI limits, as well as the individual retirement contribution limits to cater to the changing rates of inflation.
The income and contribution limits for individuals with different filing statuses in 2022
For this section, we shall take a look at the income and contribution limits for various types of individuals, based on their filing status.
|2022 Modified Adjusted Gross Income (MAGI)||
2022 Contribution Limits
|Single, head of household, married filing but separately (and did not live with his or her spouse at any time during the tax year)||Less than $129,000||$6,000 ( or $7,000 if 50 years or above) or AGI, whichever happens to be smaller|
|At least $129,000 but less than $144,000||Contribution limits are reduced|
|$144,000 or more||Not allowed to contribute|
|Married but filing separately and the individual lived with his or her spouse at any time during that tax year||Less than $204,000||$6,000 ( or $7,000 if 50 years or above) or MAGI, whichever is smaller|
|At least $204,000, but less than $214,000||The contribution limit is reduced|
|$214,000 or more||Not allowed to make contributions|
|Married filing jointly or happens to be a qualified widow(er)||Less than $204,000||$6,000 ( or $7,000 if 50 or above) or MAGI, whichever is smaller|
|At least $204,000, but less than $214,000||The contribution limit is reduced|
|$214,000 or more||Not allowed to contribute|
Backdoor Roth IRAs: Meeting the Needs of the Ineligible
If you are a high-income earner who has been disqualified from opening a ROTH IRA or making contributions to one owing to the fact that your MAGI exceeds the limits set by the IRS, then you can still take advantage of a strategy known as a Backdoor Roth IRA maneuver.
With this strategy, you can open and contribute to a Traditional IRA, which does not have income limits. You can then proceed to convert the traditional IRA to a Roth IRA.
A backdoor Roth IRA maneuver may seem similar to a Roth conversion, but there is a difference in that with the backdoor Roth IRA, an account holder is allowed to make contributions to their Roth year after year for as long as they would like to, whereas, with a Roth conversion, the contribution mostly happens all at once, or follows an approach known as the Roth conversion ladder method.
A backdoor Roth IRA maneuver is a viable long-term retirement savings approach, moreso for the high-earning young individuals who have a longer investment horizon.
Roth IRA Age Limits
Billionaire and renowned founder of Berkshire Hathaway, Warren Buffet once said that the secret to becoming successful is starting early. Time is your ally, moreso when it comes to taking advantage of the power of compound interest. A Roth IRA is a perfect choice for any investor who would like to start investing when they are young so that they can retire wealthy.
There is currently no age limit for individuals who would like to open a Roth IRA. The only thing that the IRS will require of you is that you have an earned income. Even a teenager who makes some income through part-time jobs such as cleaning or babysitting can open and contribute to a Roth IRA.
The good thing is that the IRS does not care about where the funds that make their way into the Roth IRA are sourced from, provided that the funds are earned income. A teenager who earns $4000 during their summer vacation can save the amount through their Roth IRA, or their working parents or grandparents can make contributions to this teen’s Roth IRA.
Frequently Asked Questions on “Am I Eligible for a Roth IRA?”
1. When can I start withdrawing funds from my Roth IRA?
You can withdraw the contributions (principal) you make to your Roth IRA at any time you wish to do so, without the IRS penalizing you. You cannot, however, withdraw the earnings on your contribution (principal), before 5 years since you made your first contribution are over. In addition to that, you must meet an additional qualifying factor, which is that you must be over 59 ½ years or older.
2. How much can I contribute to a Roth IRA each year?
Currently, Roth IRA account owners are required to contribute no more than $6000 to their accounts if they are aged below 50. Those who are aged above 50 can contribute a maximum of $7000. Note that the IRS adjusts this amount from time to time, to cater to the everchanging inflation rates.
3. I intend to open a Traditional IRA and a Roth IRA. What is the maximum amount I can contribute to the two retirement plans each year?
The maximum contribution limit of $6000 per year (or $7000 for those aged above 50) applies to all the IRAs an individual holds. If you, therefore, have a traditional and Roth IRA, you can only deposit a total of $6000 or $7000 to both accounts. You can, for instance, split your contributions as follows:
- Traditional IRA – $3000
- Roth IRA – $3000
4. What if I contribute to my IRA but I am not eligible?
Contributions made by those who are not eligible are perceived as excess contributions. These have tax consequences ( 6% per year for each year the excess amount is sitting in the account). You can avoid the tax penalty by withdrawing the excess amount and earnings before the tax year comes to an end.
That will be all for today’s post on “Am I eligible for a Roth IRA?” I hope that you found it informative and that now you know whether you qualify for this type of IRA. Still not sure about what Roth IRAs are about and whether you qualify? Drop me a question in the comments section below and I will get back to you ASAP!
I wish you well,
Eric, Investor and Team Member at Gold Retired!