Roth IRA Income Limits & Phaseouts: What You Need to Know

Understanding the Roth IRA phase out process is essential if you plan on contributing to one. Roth IRAs are a potentially great investment--if you qualify to contribute to them. Here are the basics of the Roth IRA phase out and how it works. 

What Is the Roth IRA Phase Out? 

The Roth IRA phase out is the income range in which the government phases out people's ability to contribute to a Roth IRA. They do not want the wealthy to be able to take advantage of this tax shelter because that could further widen the gap between the upper and lower classes.

Phase Out Ranges

The government has set up income ranges that include or exclude you from the phase out. If you are single and make between $105,000 and $120,000, you qualify for the phase out provision. If you are married and file taxes jointly, you can make between $166,000 and $176,000 to qualify for a phase out. Once you surpass $120,000 as an individual or $176,000 as a couple, you would not be eligible to make any contributions to the Roth IRA. 

Contributions

People who make less than $105,000 as individuals or less than $166,000 as couples can contribute a maximum of $5000 per year to their Roth IRAs if they are under age 50 and a maximum of $6000 if they are 50 or older. People that fall into the phase out category can contribute a partial amount to the Roth IRA. Therefore, if you begin to make more money, your ability to contribute will steadily decrease. Then, if your income surpasses the phase out range, you will not be able to contribute at all. Calculating the amount that you can contribute through the phase out can be complicated. The first part of the process is to know when the phase out applies. 

Calculating Contributions

Once you have determined that you are in the phase out range, you need to figure out how much you can contribute to the plan. Calculating the amount can be a little confusing, but if you need help, your financial professional should be able to help you.

Start by determining what your adjusted gross income is. For this example, let's say that you make $110,000 as an individual. At that income level, you can see that you would qualify for a partial contribution. You would then subtract your income from the upper limit of the phase out level. In your case, the upper limit of the range is $120,000. Therefore, you would subtract $110,000 from $120,000. This would give you a total of $10,000. You would then take that answer and divide it by the total amount of the phase. In this case, the total phase range is $15,000. Therefore, you would take $10,000 and divide it by $15,000. This would give you a percentage of .667. 

If you are under the age of 50, a full contribution would be $5000. You would then take $5000 and multiply it by your percentage of .667. This gives you a total contribution amount of $3335. Using this formula, you should be able to compute your contribution amount in compliance with the phase out rule.