A Roth IRA has a number of advantages over a traditional IRA, including that the rules on required minimum distributions don’t apply, and that withdrawals from a Roth IRA can be made on a tax-free basis after reaching retirement age.
However, some people choose a traditional IRA structure over the Roth IRA in order to receive the benefit of tax deductible contributions (for which a Roth account is not eligible). In addition, some individuals simply may not be eligible to make contributions to a Roth IRA if their income is too high. Below is a summary of the rules you need to know regarding how to determine if you’re eligible to make contributions to a Roth IRA for the 2013 tax year.
Determine Your Modified Adjusted Gross Income.
Eligibility for making Roth IRA contributions is based off of an individual’s modified adjusted gross income (“MAGI” or “Modified AGI”). The MAGI is calculated by adding back in certain types of tax-free and foreign income, plus higher education and IRA contribution deductions, back into your Adjusted Gross Income.
Tax Filing Status.
Your eligibility to make Roth IRA contributions for a particular MAGI varies with your tax filing status. For example, for the 2013 tax year, married taxpayers who file a joint return can make a full contribution (up to $5,500 for taxpayers under age 50, and up to $6,500 for taxpayers age 50 or older) if their MAGI is less than $178,000. Single taxpayers (or married filing separately but you didn’t live with your spouse at any point during 2013) can make a full contribution with a MAGI of less than $112,000.
Some taxpayers may still be eligible to make lesser contributions to a Roth IRA even if their MAGIs are above the levels outlined above. For example, married taxpayers filing a joint return can make a lesser contribution if their MAGI is between $178,000 and $188,000. Single taxpayers (or married filing separately but you didn’t live with your spouse at any point during 2013) can make a lesser contribution if their MAGI is between $112,000 and $127,000. Taxpayers who are married but file separately are only eligible for Roth IRA contributions at reduced levels, and only to the extent that their MAGI is under $10,000.
Calculating the Partial Contribution.
If you’re only eligible to make a reduced contribution, you calculate your maximum amount by first determining where your income falls in the range specified above. For example, let’s say you’re a 45 year old single taxpayer and your MAGI for 2013 is $117,000. Subtract the upper number of the reduced contribution range (i.e., $127,000 – $117,000 = $10,000). Divide the resulting number by the amount of the reduced contribution range ($15,000 for married taxpayers and $10,000 for single taxpayers), and multiply that percentage by the IRA contribution limit. In our example, that would be $10,000 / $15,000 x $5,500, or approximately $3,667. So the taxpayer in this example can contribute $3,667 to their Roth IRA for the 2013 tax year.
Even if you’re only able to make a partial contribution to a Roth IRA this year, it’s still worth considering, given the long term advantages of a Roth Account. You can always contribute to a traditional IRA in the same tax year (assuming you meet those eligibility requirements), provided that your total contributions for the year don’t exceed $5,500 or $6,500 (depending on your age).