An advantage to a Roth individual retirement account is that, unlike most other retirement plans, you can open and contribute to the account at any age. The only two requirements are that you have earned income and that your earned income does not exceed the maximum allowable limits. A Roth IRA can be especially helpful if you get a late start in saving for retirement, because it is not subject to required minimum distribution rules.
Earned Income Rules
Earned income is salary or wages earned from employment. It does not include money gifted to you, investment income, rental income or federal benefits. When determining how much -- or whether -- you can contribute, Internal Revenue Service rules say you must use your modified adjusted gross income.
A Roth IRA has income limitations and rules and two contribution levels based on your modified AGI and filing status:
- If your modified AGI falls within the first income level, you can contribute the maximum amount allowed. At time of publication, the full contribution limit is $5,500 if you are 49 years of age or younger and $6,500 if you are age 50 or older.
- If your earned income for the year is less than the contribution limit, you can only contribute up to your earned income. For example, if your annual earned income is $4,000, that's the maximum you can invest.
- If your modified AGI falls within the second range, the amount you're allowed to invest starts to decrease and phases out to zero when your income reaches the maximum allowable limit.
As an example, if you file as married filing jointly, your income must be less than $183,000 to contribute up to the limit. However, if your income falls between $183,000 and $192,999, your contribution is reduced. If your income exceeds $193,000 you cannot contribute to a Roth IRA.
Refer to IRS Publication 590-A Contributions to Individual Retirement Arrangements (IRAs):
- Worksheet 2-1 to figure your modified adjusted gross income for Roth IRA purposes
- Table 2-1 for modified AGI income ranges and maximum allowable limits
- Worksheet 2-2 to calculate reduced contribution amounts
Information for Parents and Young Investors
A legal guardian of a minor child can open a custodial Roth IRA in the child's name. Although the amount a child contributes can't be more than what she earns from a job, there's no rule that says only the child's money is eligible. For example, if your child earns $3,000 from a part-time job, the most she can contribute for the year is $3,000. However, she can invest a $1,000 gift from a parent or grandparent and $2,000 of her own money.
Information for Older Investors
Even though retirees can't contribute to a Roth IRA directly, there are alternative options:
- Your spouse can make a contribution if you are married and your spouse is still working.
- You can roll a traditional IRA into a Roth IRA. Although income tax implications make this an unwise option for some investors, Charles Schwab says it can make sense in some situations. For example, it can make sense if you don't need to fund your retirement and want to leave the account to your heirs.
- You can roll the after-tax portion of a 401(k) into a Roth IRA.