Saving for retirement is one of the most important – and likely one of the most complicated – things you will do. Contributing to a variety of different retirement savings accounts with different structures – like an employer sponsored 401(k) or 403(b), an IRA and an annuity – can help ensure that your bases are covered.
What is a Roth IRA?
An individual retirement account (aka an IRA) is an account created to help you save for retirement. Roth IRAs is a specific kind of IRA into which you can contribute after-tax dollars. The main benefit of using a Roth IRA is that your contributions and the earnings can grow tax-free then can be withdrawn tax-free after age 59½ as long as the account has been open for at least five years. Essentially, you pay taxes on the front-end and then can withdraw your money tax-free.
When you contribute to a Roth IRA, you are subject to contribution limitations. Here’s what you should know.
Roth IRA Income Limits
Roth IRAs are subject to income limits, so not everyone is able to utilize this savings vehicles. These limits are based on your modified adjusted gross income (MAGI), which is your income after accounting for certain tax deductions and penalties.
Single Filers/Head of Household
MAGI under $144,000 to contribute
MAGI under $153,000 to contribute
Married Filing Jointly
MAGI under $214,000 to contributed
Limited contributions if MAGI is $204,000 - $214,000
MAGI under $228,000 to contributed
Limited contributions if MAGI is $218,000 - $228,000
If your MAGI does not put you in a limited contribution category, you can contribute up to 100% of your compensation or the contribution limit, whichever is less. In 2022, the maximum annual contribution is $6,000 and in 2023 the maximum is $6,500. Individuals above 50 can contribute an extra $1,000 in “catch-up contributions”, so are eligible to contribute $7,000 or $7,500.
Roth IRA Reduced Contribution Limits
If you fall into the phaseout range, you can make a reduced contribution. You can calculate this by subtracting your income from the maximum MAGI level eligible for full contributions then divide that by the phaseout range to determine the percent of the maximum that you can contribute.
For example, a single filer would take their 2022 MAGI and subtract $129,000 (the maximum MAGI eligible for a full contribution). They would then divide the remainder by 15,000 (which is the phaseout range) and multiply that by $6,000 or $7,000 (the maximum contribution). Subtract that number from the maximum contribution to find your partial contribution.
Here’s a real life example for a single filer under 50 with an MAGI of $140,000.
140,000-129,000 = 11,000
11,000/15,000 = .73333
6,000-4,400=1,600 partial contribution
What Happens if You Exceed the Roth IRA Income Limit?
If you make a contribution when you are ineligible, or if you contribute more than you are allowed to based on the partial contribution limits, you will incur an IRS penalty of 6% on the improper amount for each year until you remove the excess. If you aren’t eligible for a qualified distribution, you’ll also pay the 10% early withdrawal penalty on the earnings you remove from the account.
How Can You Avoid Income Limits for a Roth IRA?
Some people who exceed the IRA contribution limits use a tactic called the backdoor IRA in which they convert a traditional IRA to a Roth IRA. When funds are transferred from a traditional IRA to a Roth IRA, taxes are owed on any funds that haven’t yet been taxed. So account holders will pay a tax bill when the funds are rolled over but will not then owe future taxes.
Can You Contribute to More than One Roth IRA?
To effectively save the money you need for retirement, your strategy should include more than one retirement plan. You can even have more than one Roth IRA if you’d like, although the contribution limit applies across all of your Roth IRA accounts.
Other Roth IRA Requirements to Know
Anyone with taxable income can contribute to a Roth IRA. For example, a teenager working their first job can start saving early. You can also set up a spousal Roth IRA for a married partner who earns little or no income – for example, while they raise young children.
You can withdraw contributions from your Roth IRA at any time. If you only withdraw an amount equal or less than the amount you’ve put in, the distribution is not considered taxable income and is not subject to a penalty, regardless of if you have reached the age or account ownership requirements. A penalty is only triggered if you don’t meet those requirements but are withdrawing earnings.
Part of a Complete Plan
Creating a robust retirement savings plan can help ensure you can reach your goals. Talk to your local Farm Bureau agent or financial advisor to get personalized assistance.