A Roth IRA has some advantages over employer-sponsored retirement plans. You have more control over the IRA and there is no hassle if you decide to change jobs. IRAs are intended for individuals with moderate incomes. To this end, the Internal Revenue Service (IRS) sets upper income limits for eligibility to contribute to a Roth IRA. If your income goes over the limit, you can't make further contributions to your Roth IRA.
You can contribute up to $5,000 in after-tax earnings to a Roth IRA each year. This rises to $6,000 when you turn 50. There is no tax deduction, as with a traditional IRA. Instead, provided you wait until you are 59 1/2 years old and the Roth account is five calendar years old, all earnings withdrawn from the account are tax exempt. Contributions can be withdrawn at any time since you don't get any tax deduction for making them. You must have earned income at least equal to the amount you contribute to a Roth IRA.
The income caps set for contributing to Roth IRAs are adjusted yearly. As of the time of publication, if you were married and filed a joint return, the cap, or phase out range, is $169,000 t $179,000. For taxpayers filing as single the limits are $107,000 to $122,000. If you were married and filed a separate return, phase out started at zero and topped out at $10,000. For Roth IRAs, phase out means you can't contribute funds to the IRA.
As the term phase out implies, allowed contributions are gradually reduced. To calculate a partial phase out, first subtract the lower income cap from the top end figure. This gives you the phase out range. Next, subtract the low end cap from your adjusted gross income (AGI) to find the excess income over the lower end cap. Divide the excess by the range and multiply the result by the contribution limit ($5,000 or $6,000) to determine how much your allowed contribution is reduced. Suppose you are single and make $113,000. The phase out range is $15,000 and you made $6,000 over the low end cap ($113,000 - $107,000). Divide $6,000 by $15,000 and multiply the result (0.4) by the contribution limit of $5,000. The result of $2,000 is the amount by which your allowed contribution is reduced, leaving you with $3,000 you can still contribute.
When you calculate a partial phase out, round the amount you can contribute up to the nearest $10 mark. Thus, $3,132 becomes $3,140. Also, until your income exceeds the upper limit of the phase out range, you may contribute $200 even if the calculation gives a lower figure. Keep in mind that the money already in your Roth IRA is not affected. You just don't get to add more.
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