Roth Individual retirement arrangements (IRAs) are popular retirement savings tools for the tax advantages they can provide. Roth IRAs are funded with after-tax dollars, so there is no immediate tax break.
Advantages of a Roth IRA that compared to a traditional IRA include tax-free qualified distributions and the ability to withdraw any amount of your principal penalty-free. Also, Roth IRA’s do not have a required minimum distribution after age 70½ as there is with a traditional IRA.
Let’s learn more about income limitations for holding a Roth IRA, contribution limits (and special rules for individuals over 50). You’ll also learn about alternative options for getting the benefits of a Roth IRA if you’re earning more than the Roth IRA limitations.
Key Takeaways
- Roth IRAs are funded with earned income that is taxed.
- The IRS prohibits you from contributing to a Roth IRA if your modified adjusted gross income (MAGI) exceeds a certain level.
- The IRS regularly adjusts contribution limits and the income caps that determine whether you are eligible to contribute to a Roth IRA.
- If you earn more than the income cap to contribute to a Roth IRA, you can contribute post-tax dollars to a traditional IRA, which does not have an income limit. Then, you can convert that to a Roth with a “backdoor” Roth strategy.
- Because there is no age requirement to have a Roth IRA, it can be an effective long-term savings vehicle for teenagers earning money.
You Need Earned Income
Any individual with earned income can open a Roth IRA. The most common forms of earned income (compensation) are taxable money earned from working for an employer or net earnings made by someone who is self-employed. Other income that can be used to fund a Roth IRA includes:
- Taxable alimony or other maintenance received under a divorce decree
- Non-taxable combat pay
- Certain taxable non-tuition and stipend payments
Money that is not considered compensation by the IRS and cannot be used to fund an IRA account includes:
- Earnings and profits made from property, such as rental income
- Pension or annuity income
- Deferred compensation
- Nontaxable alimony or maintenance
- Unemployment benefits
You can participate in an employer-sponsored qualified retirement plan such as a 401(k) or 403(b) and remain eligible to open and fund an IRA if they meet all other requirements for IRAs.
Roth IRAs Income Limits
Roth IRAs were created by the Taxpayer Relief Act of 1997. Lawmakers set income limits to prevent high-earning individuals from using them as tax shelters.
Note
With traditional IRAs, anyone who earns taxable income can contribute no matter their income. But the IRS prohibits you from contributing to a Roth IRA if your modified adjusted gross income (MAGI) exceeds a cap set by the IRS.
Eligibility to contribute to a Roth IRA is based on household income. The IRS routinely adjusts the MAGI limits and the contribution limits for inflation.
The contribution limits for 2022 are:
| Filing Status | 2022 Modified Adjusted Gross Income (MAGI) | 2022 Contribution Limits |
| Single, head of household, married filing separately (and did not live with spouse at any time during the year) | Less than $129,000 | $6,000 ($7,000 if age 50 or older) or AGI, whichever is smaller |
| At least $129,000 but less than $144,000 | Reduced contribution limit | |
| $144,000 or more | Ineligible to contribute | |
| Married filing separately and lived with spouse at any time during the year | Less than $204,000 | $6,000 ($7,000 if age 50 or older) or MAGI, whichever is smaller |
| At least $204,000, but less than $214,000 | Reduced contribution limit | |
| $214,000 or more | Ineligible to contribute | |
| Married filing jointly or qualified widow(er) | Less than $204,000 | $6,000 ($7,000 if age 50 or older) or MAGI, whichever is smaller |
| At least $204,000, but less than $214,000 | Reduced contribution limit | |
| $214,000 or more | Ineligible to contribute |
Using a Backdoor Roth IRA To Navigate Income Limits
High earners who are disqualified from contributing to a Roth IRA because their MAGI exceeds the IRS limit can still put money into a Roth through what is known as a backdoor Roth maneuver.
Using a backdoor strategy, you contribute to a traditional IRA, which has no income limits. Then you convert that to a Roth IRA. A backdoor Roth IRA strategy is similar to a Roth conversion, but it allows an individual to contribute to a Roth year after year for decades if they choose, whereas Roth conversions occur all at once or using a Roth conversion ladder method.
Matthew Mancini, a senior wealth planner at Wilmington Trust’s Emerald Family Office and Advisory, told The Balance in a phone interview that he thinks the backdoor Roth strategy is an excellent long-term retirement savings approach, especially for younger people with longer investing horizons.
Note
You can minimize tax consequences if the conversion to a Roth is made soon after the traditional IRA is funded. It can provide the benefits of a Roth IRA, including no required minimum distribution and tax-free growth and tax-free distributions for the account holder as well as their heirs.
Roth IRA Age Limits
A basic tenet of investing is that time is an investor’s best friend. With that in mind, a Roth IRA can be used as a powerful savings tool for young people earning money.
There is no age limit for someone to open a Roth IRA. The only requirement is that it must be funded with earned income. A teenager who earns money through a part-time job like babysitting can fund a Roth IRA up to the amount they earn or the contribution limit.
Note
Custodial Roth IRA for minors require a minor’s guardian to serve as custodian of the account until the account holder turns 18. Even modest amounts contributed to an IRA early can add up to significant gains by retirement.
As Mancini explained, the IRS doesn’t care where the funds deposited in a Roth IRA come from as long as the account holder has earned that amount. So, a teenager who earns $3,500 through a summer job could use that money for other purposes while the child’s parent or grandparent contributes the $3,500 to the teen’s Roth IRA.
Mancini said many people do not take advantage of opening an account for a minority, or using the backdoor Roth strategy. in part because they never explored Roth IRA options due to their high income precluding them from contributing to a Roth themselves.
Keep in mind the IRS has implemented a five-year rule for Roth IRA that stipulates any earnings can be withdrawn from a Roth tax-free and penalty-free if it has been five years since you first contributed to the account and you meet one additional qualifying factor, such as being 59½ or older.
Roth IRA Contribution Limits
The IRS sets a limit to the amount that can be contributed to an IRA annually – $6,000 in 2022 or $7,000 if you’re over age 50. This amount is adjusted by the IRS regularly (but not every year) to account for inflation.
This maximum applies to all IRAs an individual holds. Thus, if they have both a traditional IRA and a Roth IRA, they can only deposit the maximum amount allowed during that tax year. They cannot deposit the maximum into each of the IRAs.
You can contribute the maximum amount each year, but then the contribution limit declines at a certain level of household AGI. For 2022, the Roth IRA contribution limit is reduced or eliminated in the following situations:
- You are filing with a “married filing jointly” status or as qualifying widow(er) and your MAGI is at least $204,000 to $214,000. Once your MAGI is $214,000 or more, you can’t make a contribution.
- You are filing status as “single, head of household” or “married filing separately,” you didn’t live with your spouse at any time in 2022 and your modified AGI is at least $129,000 to $144,000. After that, you can’t make contributions.
- You are “married filing separately,” you lived with your spouse at any time during the year, and your modified AGI is from $0 to $10,000. After that, you can’t make a Roth IRA contribution.
Frequently Asked Questions (FAQs)
Who is eligible to contribute to a Roth IRA?
Anyone with earned income, even minors, may open and fund a Roth IRA as long as their adjusted gross income does not exceed IRS limits. However, the IRS prohibits individuals from contributing to a Roth IRA if their modified adjusted gross income (MAGI) exceeds a cap set by the IRS.
What happens if I contribute to my IRA but I’m not eligible?
If you contribute to an IRA, but you’re not eligible, you’re making excess contributions, which have tax consequences. Excess contributions are taxed at 6% per year for each year the excess amount remains in the IRA. The penalty can be avoided by withdrawing the excess amount and earnings before the tax year is over.
Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
Thanks for your feedback!