A Roth IRA offers serious benefits to savers.
It is an individual retirement account. That means you open it up and fund it, not your employer.
Best of all, you’re investing money that you’ve already paid taxes on. Your money grows … and grows … and once you are 59½ years old and the account is at least five years old, everything is tax-free.
Because the Roth IRA tax savings are generous, Uncle Sam limits how much you can and how much you can make to be eligible to contribute.
Here are the Roth IRA limits you need to know.
Roth IRA limits for 2020
The IRS usually adjusts the Roth IRA contribution and income limits every year. These are the limits for 2020.
Contribution limits for Roth IRA: how much can you invest?
If you are under 50, you can contribute up to $ 6,000 to an IRA in 2020. If you are 50 years or older, you can add an additional $ 1,000, which means your limit is $ 7,000.
Note that these are the limits on your total IRA contributions. If you have both a Roth IRA and a Traditional IRA and are under 50, your total contributions to both accounts cannot exceed $ 6,000.
What about married people? A couple cannot open an IRA. Remember: it is a Individually Retirement account.
Provided you meet the eligibility requirements (which we’ll discuss in a moment), you can open one Roth IRA at a time, contributing a maximum of one contribution so that you contribute between your two IRAs totaling $ 12,000 or up to $ 14,000 if you do are both part of the over 50s.
You can fund your Roth IRA for the year through the registration deadline, so you have until April 15, 2021 to maximize your 2020 contribution.
Roth IRA Income Limits: Are You Earning Too Much?
To contribute to any type of IRA, you must first have a taxable income, e.g. B. Money you earn from a regular job or income from self-employment.
To determine if you qualify, you need to calculate your Modified Adjusted Gross Income, often abbreviated as MAGI or Modified AGI. This is your gross adjusted income, which you can find on your tax form 1040, 1040a, or 1040ez plus some deductions, such as B. Interest payments on your student loans or contributions to a health savings account. (Since your MAGI is important to Roth IRAs, that’s what we’ll talk about when we refer to income in this article.)
If you are single, head of the household, or married and have never lived with your spouse during the tax year, you can help:
- The maximum amount if your income is less than $ 122,000;
- An amount that will expire if you earn more when your income is at least $ 122,000 but less than $ 137,000.
- Nothing if your income is $ 137,000 or more.
If you are married and are a qualified widow (s) together, you can help:
- The maximum amount if your income is less than $ 193,000;
- An amount that will expire if you earn more when your income is at least $ 193,000 but less than $ 203,000.
- Nothing if your income is over $ 203,000.
If you are married and have lived with your spouse at any point during the tax year, you can help:
- A reduced amount if your income is less than $ 10,000;
- Nothing if your income is $ 10,000 or more.
Your IRA contributions cannot exceed your annual income. So if you make $ 5,000 in 2020, that will be your max contribution for the year.
How Much Can You Contribute to a Roth IRA?
|Tax return status||2019 income||Maximum contribution|
|Single, head of household or married registration together||Under $ 122,000||$ 6,000 ($ 7,000 50+)|
|$ 122,000 to $ 136,999||Reduced amount|
|Over $ 137,000||Not eligible|
|Married joint registration or qualified widow (s)||Under $ 193,000||$ 6,000 for each person ($ 7,000 for ages 50 and over)|
|$ 193,000 to $ 202,999||Reduced amount|
|Over $ 203,000||Not eligible|
|Married registration separated (lived with spouse at some point in the tax year)||Under $ 10,000||Reduced amount|
|$ 10,000 or more||Not eligible|
Roth IRA Age Limits: Do You Ever Have to Stop Contributing?
You can open a Roth IRA at any age as long as you have taxable income. Then – as for the rest of your life – you can contribute forever as long as you are earning income, as Roth IRAs have no age limit.
You also never need to take money out of your Roth IRA as there are no minimum payouts or RMDs required which is IRS for mandatory withdrawals. That means you can leave it to a beneficiary who can make tax-free withdrawals after your death.
However, if you are withdrawing your Roth IRA earnings early, it is important to know that you will often pay taxes plus a 10% penalty. Early means before the account is 5 years old and before you are 59-1 / 2 years old. However, you can withdraw your contributions at any time. In certain circumstances, you may be able to avoid early withdrawal penalties, such as: B. if you use the money to buy a house or certain medical expenses.
3 clever ways to bypass the limits of the Roth IRA
Now that you know the Roth IRA limits for 2020, you also need to know that there are some perfectly legitimate ways to get around them. Here are three ways you can avoid getting into trouble with the IRS.
1. Increase your 401 (k) posts
Unlike a Roth IRA, a 401 (k) is funded with pre-tax dollars, which reduces your taxable income. So, if you’re making too much to fund a Roth IRA but have access to a 401 (k) or other employer-sponsored plan, reducing your taxable income through additional contributions may be an option.
If you’re under 50, you can contribute up to $ 19,000 towards a 401 (k) in 2020. If you are 50 years or older, the maximum contribution is $ 25,000.
2. Open an IRA to a non-working spouse
Do you remember how we said you have to earn income to open an IRA? Well there is one exception.
If you have a spouse who is not working, you can open an IRA – Roth or traditional – for them and contribute the maximum amount allowed for their age, provided you have an income equal to the amount you put in your spouse’s IRA enter and your own IRA.
The same IRA limits apply: you can’t contribute more than $ 6,000 per year if your spouse is under 50, or $ 7,000 per year if your spouse is 50 or older. If you are married and jointly file with income in excess of $ 203,000, you will not be eligible to fund a Roth IRA for you or your spouse, although you can still fund traditional IRAs for both of you.
3. Open a Roth IRA backdoor
There’s a big loophole in the Roth IRA income limits that we just told you about: if you’re making too much money to open a Roth IRA, you can open a Roth IRA back door where you’re basically opening a traditional IRA and convert to a Roth IRA.
There are many complicated rules and tax ramifications when you open a Roth IRA back door. So be sure to speak to a financial advisor if you are considering one.
Robin Hartill is the Senior Editor at The Penny Hoarder.