How Much to Add to a Roth IRA?

by John Kibilko

How much investor should to add to their Roth IRA depends on several factors concerning the investor. These include income level, age, years to retirement, marital status, additional retirement-savings plans, and other factors. Although these factors will vary among investors, if you want to get the most out of a tax-advantaged Roth IRA, the best thing you can do is contribute as much as you can afford.

What is a Roth IRA?

Roth IRAs are tax-exempt plans, as opposed to tax-deferred plans like traditional IRAs and 401(k) plans. This means that Roth IRA contributions are made on an after-tax basis and not on a pretax basis. Pretax plans enjoy the benefit of lowering a participant's tax burden by deducting contributions before taxes are taken. Roth IRAs require after-tax contributions but, unlike pretax plans, Roth IRAs offer tax-free distributions when investors reach age 59 1/2. Pretax plan participants must pay taxes on both principal and earnings when they withdraw funds. Roth IRAs also aren't employee sponsored like 401(k)s are, so there are no matching funds.

Eligibility & Contribution Limits

You must receive taxable compensation or receive self-employment income during the same year that you open a Roth IRA. The contribution limit for 2011 is $5,000 annually, $6,000 for people over age 50, or the amount of 2010 taxable compensation if lower than $5,000 or $6,000. A 401(k) plan has no income limits for participants, but a Roth IRA requires that contributors meet income guidelines established by the IRS. Generally, modified adjusted gross income must be less than $177,000 for married couples filing jointly, and less than $120,000 for single filers, head-of-household filers or married people filing separately. It also has to be less than $10,000 for married people filing separately who lived with their spouses at any time during the tax year.

Stand-Alone Strategies

If you don't have access to an employer-sponsored plan, you're probably faced with a decision between a traditional or Roth IRA. In most cases, a Roth IRA trumps a traditional non-deductible IRA. Despite the similarities in contribution limits and income criteria, Roth IRAs provide tax-free distributions. Non-deductible traditional IRAs not only require after-tax contributions but also require taxes to be paid when distributions are taken. In this case, contributing as much as possible to your Roth IRA is recommended. A deductible, or pretax, IRA offers the advantage of lowering same-year taxable income, but it too requires the payment of taxes --- both on principal and earnings --- at distribution time. Choosing between the two plans requires a review of future income and tax-bracket levels but, once the decision is made, maximum contributions again are suggested.

401(k) Plus Roth IRA

If you're enrolled in an employer-sponsored 401(k) plan, you should maximize that opportunity before contributing to a Roth IRA. You should contribute to your 401(k) at least enough to maximize your employer's contribution. For example, if your employer matches your contribution dollar for dollar up to, say, 6 percent, you should contribute at least 6 percent of your paycheck. If your employer matches only 25 percent of your contribution up to 3 percent, you need to contribute 12 percent to fully capture your employer's contribution. Only after maximizing your 401(k) plan should you contribute to another plan, such as a Roth IRA. Again, maximizing your Roth contribution is recommended but, after maximizing your employer's contribution amount, you might back off your 401(k) contributions and consider moving more funds into your Roth IRA. This formula will be based on your income level, anticipated future income level and post-retirement tax considerations.


If a 20-year-old in the 28 percent tax bracket contributes $3,000 annually to a Roth IRA until age 60, assuming interest earnings of 8 percent, he would have $839,343. But, if he maximizes his contributions to the $5,000 limit, the yield after 40 years would be almost $1.4 million.

About the Author

John Kibilko has been writing professionally since 1979. He landed his first professional job with "The Dearborn Press" while still in college. He has since worked as a journalist for several Wayne County newspapers and in corporate communications. He has covered politics, health care, automotive news and police and sports beats. Kibilko earned a Bachelor of Arts in journalism from Wayne State University.

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