Roth IRA Contribution Limit Phase Out

What is the Roth IRA contribution limit phase out?

Few people know that your ability to make a Roth IRA contribution phases out as your income rises?

If you make regular annual contributions to your Roth IRA, you need to know at what point your maximum allowable contribution starts to phase out.

If you don't, you might mistakenly contribute more than the allowable limit.

So let's find out when your contribution limit phases out, how much it phases out, and how it impacts you.

The Roth IRA Contribution Limit Phase Out Range

If you earn under a certain amount of money each year, you qualify to make the maximum allowable contribution to your Roth IRA ($5,000 if you're under 50 and $6,000 if you're 50 or older).

Likewise, if you earn too much, you're barred from making any contribution at all.

But what if your income falls somewhere in between those two extremes?

In that case, your maximum Roth IRA contribution limit phases out according to where your income falls within the predetermined IRS ranges.

And exactly where your income falls within the IRS range for your tax filing status determines how much you can contribute.

So if your income falls within the phase out range, how do you figure out your maximum contribution limit?

Roth IRA Contribution Limit Phase Out Calculations

You calculate your Roth IRA contribution limit phase out on a percentage basis.

To calculate your limit - take your income, subtract the maximum income you can earn while still making the maximum contribution, and divide that figure by the phase out range for your tax filing status.

Sounds easy... Right?

Don't worry, it's really NOT that complicated.

Let's take a look at an example where the Roth IRA contribution limits phase out.

Roth IRA Contribution Limit Phase Out Example

Let's say you're married and filing a joint tax return with your spouse.

For 2011, the Roth IRA contribution limit phase out takes effect if you earn between $169,001 and $179,000.

You and your spouse are 57 years old with a combined income of $174,000.

At first glance, it's clear that you're ineligible to make the maximum $5,000 Roth IRA contribution, but it's also clear that you haven't passed the $179,000 cutoff for making a contribution.

So how much can you contribute?

First, subtract the maximum contribution income limit ($169,000) from your income:

$174,000 - $169,000 = $5,000

That gives you $5,000. Now, divide the $5,000 by the phase out range of $10,000 ($179,000 - $169,000) designated for your tax filing status...

$5,000 / $10,000 = 50%

That gives you 50%.

So what does that mean?

It means you can make a contribution that's 50% less than the maximum Roth IRA contribution for your age bracket.

In this case, your contribution limit is 50% of $6,000, or...

$3,000.

So $3,000 is the maximum amount you can contribute.

If you were under age 50 and your maximum Roth IRA contribution were $5,000, your contribution limit under the same circumstances is 50% of $5,000. Which, of course, is $2,500.

Does that make sense?

Roth IRA Contribution Limit Phase Out Rules

While the above featured example is accurate, your earned income isn't always a nice round number, is it?

So when performing your Roth IRA contribution limit phase out calculations, keep the following rules in mind:

1) Use $10 Intervals - If you calculate your maximum phase out contribution, and it doesn't provide you with an even $10 interval, simply round up to the next highest $10 interval.

2) The $200 Minimum - Unless you're altogether ineligible to contribute, your maximum Roth IRA contribution limit can not be less than $200. So if your Roth IRA contribution limit phase out calculations tell you you're only eligible to contribute $150, bump that figure up to $200.

Need some examples? Let's look at two:

Example #1

Let's say it's 2011 - you're married, 61 years old, and you and your spouse have a combined income of $178,700.

How much can you contribute?

Start by subtracting the maximum contribution income limit ($169,000) from your income:

$178,700 - $169,000 = $9,700

Divide the $9,700 by the phase out range of $10,000 ($179,000 - $169,000) designated for a married couple in 2011:

$9,700 / $10,000 = 97%

In this case, your contribution limit is only 3% of $6,000, or...

$180.

So is $180 your maximum Roth IRA contribution limit?

No.

Remember, if your contribution limit comes to greater than zero, but less than $200...

Automatically round it up to $200.

Example #2

Let's say it's 2011 - you're single, 37 years old, and earn $111,081.48.

What's your maximum contribution limit?

To find out, subtract the maximum contribution income limit ($107,000) from your income:

$111,081.48 - $107,000 = $4,081.48

That gives you $4,081.48. Now, divide that $4,081.48 by the phase out range of $15,000 ($122,000 - $107,000) designated for single tax filers in 2011.

$4,081.48 / $15,000 = 27.2098%

That gives you 27.2098%.

That means your contribution limit comes to 72.7902% of $5,000, or...

$3,639.51

But...

Since you need to round up to the next highest $10 interval - your Roth IRA contribution limit is $3,640.

The Roth IRA Contribution Limit Phase Out and Catch Up Contributions

So how does all of this effect Roth IRA catch up contributions?

Hopefully, the above examples helped to explain that. But just to reiterate...

If you qualify to make the maximum Roth IRA contribution possible, you can contribute:

• $5,000 if you're under 50
• $6,000 if you're 50 years old or older

Both of these contribution limits phase out according to where your income falls within the limit range.

But as a general rule, catch up contributions are always the maximum contribution limit for someone younger than 50 with the same income and tax filing status, plus 20%.

So if you're over age 50, just calculate your contribution limit if you were under age 50. Then add an extra 20%.

It's really that simple!

Conclusion

Your maximum Roth IRA contribution limit phases out as you earn more than the IRS income limit designated for your tax filing status.

So before you make your maximum annual Roth IRA contribution, make sure your income doesn't place you within the range where your contribution limits phase out.

Always use a percentage basis to calculate your Roth IRA phase out contribution limit.

But remember to round off your contribution limit to the next highest $10 interval if it's not already an interval of $10. And if you're eligible to make a contribution, but your calculations reveal a maximum limit of less than $200, round that number up to $200.

Follow these Roth IRA contribution limit phase out rules, and you'll have no problem calculating your exact Roth IRA contribution limit for the upcoming year.

But if you still need help figuring out your limit, see Roth IRA Phase Out for more info.