As tempted as you might be by the tax-free distributions offered by the Roth IRA, you need to make sure that you can contribute. The Internal Revenue Service limits who can contribute based on income. For some people, this means a lower contribution limit, while for others it means you are ineligible to make a Roth IRA contribution.

## Modified Adjusted Gross Income

Your modified adjusted gross income must fall below the annual limits to qualify to contribute to a Roth IRA. For the purposes of contributing to a Roth IRA, your MAGI equals your adjusted gross income minus any Roth IRA conversions during the year plus any traditional IRA deduction, student loan interest deduction, tuition and fees deduction, domestic production activities deduction, foreign earned income exclusion, foreign housing exclusion or deduction, exclusion of qualified bond interest shown on Form 8815 and exclusion of employer-provided adoption benefits shown on Form 8839. If you fall in the phaseout range for your filing status, your contribution limit goes down. If you exceed the MAGI limit, you do not qualify to contribute to a Roth IRA.

## Annual Contribution Limits

The IRS prohibits you from contributing more than the smaller of the annual contribution limit or your compensation for the year. Your annual contribution limit differs if you are under age 50 rather than if you are 50 or older because if you fall in the latter category, you can make a larger contribution. For example, as of publication, if you are under 50, you can only put in $5,000 but if you are 50 or older, you can put in $6,000.

## Taxpayers in the Phaseout Range

If you fall in the phaseout range, you have to manually calculate how much you qualify to contribute to your Roth IRA. Subtract the lower end of your phaseout range from your modified adjusted gross income and divide the result by the size of your phaseout range. Next, multiply the result by your maximum Roth IRA contribution based on your age and subtract the result from your maximum contribution to find the amount you can contribute. For example, if you are single and have a MAGI of $108,000, subtract $105,000 from $108,000 to get $3,000. Next, divide $3,000 by $15,000 to get 0.2. Then, if your maximum contribution equals $6,000, multiply $6,000 by 0.2 to get $1,200. Finally, subtract $1,200 from $6,000 to find your maximum Roth IRA contribution for the year equals $4,800.

## Penalties for Contributing Extra

When you contribute money to a Roth IRA that exceeds your annual contribution limit, the IRS imposes a 6-percent income tax penalty on the extra contributions. For example, if your MAGI is too high and therefore you cannot contribute, but you put $4,000 in your Roth IRA anyway, you would have to pay a $240 penalty on your taxes. In addition, you continue to pay the penalty each year you do not correct the excess.

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