# How to Calculate Funds for a Roth IRA

by Mark Kennan

The Roth individual retirement account allows you to save money on an after-tax basis. This means that you include the amount of the funds you add to your Roth as part of your taxable income in the year you make the contribution, but you get to withdraw the funds without paying taxes on the withdrawals. Knowing how much you can fund your Roth IRA each year helps you avoid any an excess contributions income tax penalty. If you fall in the phaseout range, your maximum contribution is decreased as you approach the absolute income limit.

1. Calculate your modified adjusted gross income for the year by adding back any deductions taken for a traditional IRA contribution, student loan interest, tuition and fees, domestic production activities, foreign earned income, foreign housing, excluded savings bond interest and employer-provided adoption benefits. For example, if you have an adjusted gross income of \$167,000 but took a \$4,000 tuition and fees deduction, your MAGI equals \$171,000.

2. Compare your MAGI to the limits for your filing status. These limits adjust annually and are printed in IRS Publication 590, which is also available online. If you fall in the phaseout range, you have to calculate how much you can contribute. If you exceed the limits, you cannot contribute at all to your Roth IRA. In this example, if you are married filing jointly, the phaseout range runs from \$169,000 to \$179,000 in 2011, so a MAGI of \$171,000 falls in the phaseout range.

3. Subtract your MAGI from the upper limit of the phaseout range. In this example, subtract \$171,000 from \$179,000 to get \$8,000.

4. Divide the result by the size of the phaseout range. In this example, the size of the phaseout range equals \$10,000, so divide \$8,000 by \$10,000 to get 0.8.

5. Multiply the result by the maximum allowable Roth IRA contribution for the year. In this example, if your maximum contribution equals \$5,000, multiply \$5,000 by 0.8 to find you can put up to \$4,000 of funds in your Roth IRA for the year.

#### Warning

• In addition to meeting the income requirements, you must have earned income to contribute to a Roth IRA. Earned income includes wages and salaries, but not income such as interest or stock dividends.