Rules of the Roth IRA: Income Limits, Contributions, and More

For many financial growth professionals, Roth IRAs are the most exciting play in the retirement savings game. It’s easy to understand why: tax-free growth and tax-free distribution. You put the money in after taxes, it grows tax-deferred, and comes out tax-free as long as you wait until you’re 59-1/2 years old.

“If your goal is to save as much for retirement as possible, then it’s a slam dunk for the Roth IRA,” says Jeffrey Layhew, president and wealth advisor at Wealth Resources Network.

While not everyone can enjoy its perks, the Roth IRA income limits are fairly high: For 2019, if you make less than $137,000 as an individual or less than $203,000 as a married couple filing jointly, you can contribute at least something to a Roth IRA. If you earn more than those limits, you can’t fund a Roth IRA (that is, unless you use the backdoor).

Regardless of your road to a Roth, there are residual benefits to funding a nest egg with after-tax contributions. “We don’t know what our tax rates will be in the future,” says Layhew. “If they’re much higher, it’s a beautiful thing when you’ve got a Roth IRA.”

Further, if you’re in the position to open a Roth IRA early in your professional career, you’re probably paying less taxes on a smaller amount of money than you would be if you paid taxes at distribution, as with a traditional IRA. “Early in your career, the Roth makes more sense—you’re usually in a lower tax bracket and the tax deduction [of a traditional IRA] doesn’t mean that much to you,” says Layhew.

As long as you qualify and play by the rules, a Roth IRA is a great way to save for retirement—which is why the Internal Revenue Service strictly enforces contribution limits, income limits, conversion rules, and distribution rules. Reading the fine print will help you avoid penalties that could cut into that pile of money you worked so hard to put away.

Roth IRA Income and Contribution Limits

The contribution limits on a Roth IRA are primarily based on your income. The most you can put into any IRA in 2019 —be it a Roth, traditional, or combination of the two—is $6,000 (an increase from $5,500 in 2018). If you’re at least 50 years old, that number bumps up to $7,000.

But a Roth IRA has income limits, too. If you make between $123,000 and $137,000, or between $193,000 and $203,000 as a married couple filing taxes jointly, then the amount you’re allowed to contribute starts to drop. Roth IRA income limits are based on your adjusted gross income (AGI) and conform to the chart below, which is found on the IRS website.

Roth IRA Income and Contribution Limits for 2019
Filing StatusModified Adjusted Gross Income (AGI)Contribution Limit
Married filing jointly or a qualifying widow(er)Less than $193,000$6,000 (50 or older: $7,000)
Between $193,000 and $203,000Reduced contribution amount
$203,000 or moreZero
Married filing separately, and you lived with your spouse at any time during the yearLess than $10,000Reduced contribution amount
$10,000 or moreZero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the yearLess than $123,000$6,000 (50 or older: $7,000)
Between $123,000 and $137,000Reduced contribution amount
$137,000 or moreZero

A few things to note:

  • You can fund your 2018 Roth IRA well into 2019, right up until you file your taxes, granted you file them before April 15, 2019. The contribution limit for 2018 is $5,500 ($6,500 if you’re over 50).
  • You can never put in more money than your taxable compensation for the year, if your taxable compensation is less than the limit for your age bracket. In other words, a 21-year-old single man claiming $3,200 on his taxes can’t put more than $3,200 into his Roth IRA.
  • Unlike a traditional IRA, you can continue to contribute to a Roth after you turn 70½ years old.

Roth IRA Conversion and Distribution Rules

If you’re rolling funds into a Roth IRA from a qualified retirement plan, the contribution limits don’t apply, but some different rules do. Basically, you can convert as much money as you want from a traditional IRA (for instance) to a Roth IRA, just remember that you’ll have to pay taxes on that amount of money upfront, in that tax year, and that you generally have only 60 days to complete your rollover upon distribution. Remember, too, that the rollover (and each subsequent rollover you make) must be left in the account for five years before you can touch it without penalty.

When it comes to withdrawing funds from a Roth IRA, it’s important to note the difference between contributions and earnings. The money you put into the account — your contributions — can be distributed back to you at any time without penalty. After all, you’ve already paid taxes on this money. In addition, you can withdraw contributions and earnings by tax day of the year you funded the Roth IRA penalty-free, but you have to pay income taxes on the earnings.

For your Roth IRA earnings — the investment gains your contributions make while sitting in your retirement savings account — you must adhere to a five-year, 59½-years-old rule: Your account needs to be at least five years old, and you need to be 59½ years old to withdraw earnings tax- and penalty-free. If you withdraw earnings early, they’re subject to both income taxes and a 10% penalty for unqualified distribution. Not fun.

A Roth IRA offers some surprisingly flexibility, however, and there are a number of exceptions to the early distribution rules. You can withdraw funds early, and without taxes or penalties, in the following circumstances:

  • Your distribution is for a first-time home purchase (in which case you can pull out as much as $10,000).
  • You’re using the distributions to pay qualified higher education expenses.
  • You’re dead. In that case, your beneficiary or your estate can withdraw the earned funds without incurring the 10% tax.
  • You are considered totally and permanently disabled.
  • You have unreimbursed medical expenses that are more than 10% of your adjusted gross income for the year (7.5% if you or your spouse was born before Jan. 2, 1951).
  • You’re paying medical insurance premiums during a period of unemployment.

When Does It Make Sense to Open a Roth IRA?

Before you open a Roth IRA, first make sure you’re getting the most out of your 401(k). If your company matches your contributions up to a certain percentage, make sure you put at least that much into your company plan. “We match 3%,” said Layhew. “If people don’t put in the 3%, they’re foolish because it’s a 100% return on their money with no risk whatsoever.”

If you’re a couple of years from retirement at the peak of your career, it might be better for you financially to go with a traditional IRA, rather than a Roth. Play around with an online calculator, or talk to the guy where you get your taxes done. According to Layhew, there’s a certain point in your career where it makes more fiscal sense to pay the taxes in retirement — when you’ll probably be withdrawing funds in a lower tax bracket — than to forego the tax break for earnings that won’t have enough time to bake before you start taking them out.

And finally, try to plan for everything by having a little bit of everything. Mixing a Roth’s flexibility with the required minimum distribution requirements of other retirement accounts can help you balance your savings—and how it gets taxed—against your needs. “Think about this: We all want to diversify our investments, imagine if you could diversify your taxes?” Leyhew said. “And that’s basically what I’m trying to accomplish.”

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