Roth IRA Phase Out
Do contribution limits on your Roth IRA phase out as your income rises?
If you plan to make a Roth IRA contribution this year, you need to know. Otherwise, you might inadvertently contribute more than the allowable limit.
So is it true that your Roth IRA contribution limit phases out as your income rises?
Yes. It's true.
So let's find out when the contribution limits phase out, how much they phase out, and how all of it effects you...
The Roth IRA 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. 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 contribution limit phases out according to where your income falls on a sliding scale.
So what are the income ranges where the contribution limits for a Roth IRA phase out?
Your Roth IRA maximum contribution limit phases out if...
Exactly where your income falls within the ranges outlined above determines how much you can contribute.
So what happens if your income falls within one of these ranges? What's the maximum contribution limit?
The maximum contribution limit varies dramatically depending on your exact income. So figuring out your contribution limit requires a few calculations...
How To Calculate the Roth IRA Phase Out
So how do you calculate a Roth IRA phase out contribution?
It works on a percentage basis.
One way to calculate your limit is to 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.
Don't worry, it's really NOT that complicated.
Sometimes the best way to illustrate a point is by showing instead of telling.
So let's look at a Roth IRA phase out example for each tax filing status...
Married Filing Jointly
Let's say you're married and filing a joint tax return with your spouse.
For such persons, the Roth IRA phase out takes effect if you earn between $169,001 and $179,000.
You and your spouse are 45 years old and have a combined income of $174,000.
At first glance, it's clear that you're ineligible to make the maximum $5,000 contribution, but it's also clear that you haven't passed the $179,000 threshold 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 that $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 $5,000, or...
So $2,500 is the maximum amount you can contribute.
Once you reach age 50 and the maximum Roth IRA contribution rises to $6,000, your contribution limit under the same circumstances is 50% of $6,000. Which, of course, is $3,000.
Does that make sense?
Let's try another example...
Single, Head of Household, or Married Filing Separately (And Didn't Live With Your Spouse)
Let's say you file your taxes as head of household.
In such a case, the Roth IRA phase out takes effect if you earn between $107,001 and $122,000.
You're 29 years old with an earned income of $111,500.
Since your income falls within the $107,001 to $122,000 range, how much can you contribute?
First, subtract the maximum contribution income limit ($107,000) from your income...
$111,500 - $107,000 = $4,500
That gives you $4,500. Now, divide that $4,500 by the phase out range of $15,000 ($122,000 - $107,000) designated for your tax filing status...
$4,500 / $15,000 = 30%
That gives you 30%.
So what does that mean?
It means you can make a contribution that's 30% less than the maximum Roth IRA contribution for your age bracket.
In this case, your contribution limit is 70% of $5,000, or...
So $3,500 is the maximum amount you can contribute.
If you're 50 years old or older instead of 29, the maximum Roth IRA contribution limit is $6,000. So your contribution limit under the same circumstances above is 70% of $6,000... or $4,200.
Is this starting to make sense?
Let's try one more example...
Married Filing Separately (And Lived With Your Spouse)
Let's say you're married, but you file your taxes separately from your spouse. But you aren't separated from your spouse. You both remain happily married.
How does the Roth IRA phase out effect you?
For such people, the Roth IRA phase out takes effect if you earn between $1 and $10,000.
Let's say you're 35 years old and you work part-time making $7,800 per year. Your spouse works full-time and the two of you live off of your spouse's income. That means your income is free to fund your Roth IRA.
But since your income falls within the $1 to $10,000 range, you aren't sure of your contribution limit.
Exactly how much can you contribute?
First, subtract the maximum contribution income limit ($0) from your income...
$7,800 - $0 = $7,800
That gives you $7,800. Now, divide that $7,800 by the phase out range of $10,000 ($10,000 - $0) designated for your tax filing status...
$7,800 / $10,000 = 78%
That gives you 78%.
So what does that mean?
It means you can make a contribution that's 78% less than the maximum Roth IRA contribution for your age bracket.
In this case, your contribution limit comes to 22% of $5,000, or...
So $1,100 is the maximum amount you can contribute.
But what if you're 55 instead of 35?
What's your limit then?
Simply calculate 22% of $6,000...
Which comes out to $1,320.
Does that make sense?
It's really simple once you get the hang of it.
Just make sure to keep the following rules in mind...
Two Phase Out Rules to Remember
While the basic math used in the examples above still applies, you aren't always going to have earned income that's a nice round number, are you?
So when performing your Roth IRA phase out calculations, keep these rules in mind...
1) Even $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) A $200 Minimum - You can't have a maximum Roth IRA contribution limit of less than $200 unless you're ineligible to contribute at all. So if your Roth IRA phase out contribution calculation tells you you're eligible to contribute $150, round that figure up to $200.
Need further explanation? Let's look at a couple of examples...
Let's say you're single 46 years old, and earn $114,143.78.
What's your Roth IRA phase out contribution limit?
To find out, subtract the maximum contribution income limit ($107,000) from your income...
$114,143.78 - $107,000 = $7,143.78
That gives you $7,143.78. Now, divide that $7,143.78 by the phase out range of $15,000 ($122,000 - $107,000) designated for your tax filing status...
$7,143.78 / $15,000 = 47.6252%
That gives you 47.6252%.
That means your contribution limit comes to 52.3748% of $5,000, or...
Since you need to round up to the next highest $10 interval...
Your Roth IRA contribution limit is $2,620.
Let's say you're married, 62 years old, and you and your spouse have a combined income of $178,800.
How much can you contribute?
Start by subtracting the maximum contribution income limit ($169,000) from your income...
$178,800 - $169,000 = $9,800
Divide the $9,800 by the phase out range of $10,000 ($179,000 - $169,000) designated for your tax filing status...
$9,800 / $10,000 = 98%
In this case, your contribution limit is only 2% of $6,000, or...
So is $120 your Roth IRA contribution limit?
Remember, if your contribution limit calculates as greater than zero, but less than $200...
You automatically round it up to $200.
So in this case, your maximum Roth IRA contribution limit is $200.
The Roth IRA 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...
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 the age of 50, just calculate what your contribution limit would be if you were under the age of 50. Then, tack on an extra 20%.
It's really that simple...
But don't forget your $10 interval or $200 minimum contribution limit rules!
The maximum contribution limit on your Roth IRA phases out as you earn more than the IRS income limit designated for your tax filing status.
So before you go ahead and make the maximum annual Roth IRA contribution, make sure your income doesn't place you within the range where your contribution limits phase out.
Use a percentage basis to calculate your Roth IRA phase out contribution limit...
But remember, 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 tell you your maximum limit is less than $200, round that number up to $200.
Follow these Roth IRA phase out rules, and you'll have no problem calculating your exact Roth IRA contribution limit for the upcoming year.
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