Every once and awhile the IRS increases contribution limits or income limits for Roth IRAs. This year, while contribution limits are staying the same, income limits have increased for who is eligible to contribute to a Roth IRA. For 2018, eligible participants may contribute up to $5,500 toward their Roth IRA. If you are older than 50 you can contribute up to $6,500. Contributions can be made anytime between January 1, 2018 to April 15, 2019 to count as 2018 contributions. Since Roth IRA funds are tax-free upon distribution, there are income limits set for who can contribute to these types of accounts. An explanation of these limits is outlined below.
- Married Filing Jointly. Couples who earn less than $189,000 combined may contribute the maximum amount toward their Roth IRA. Couples earning between $189,000 and $198,999 have tiered contribution limits. Couples earning $199,000 or more are ineligible for Roth IRA contributions.
- Married Filing Separately. If you are technically still married but have been living apart from your spouse for the past year, you may file separately. If you are filing separately, then you will not be eligible to contribute to a Roth IRA if you make more than $10,000. If you earn $0, you may contribute $5,500, and the amount will phase out between $1 and $9,999.
- Single. Single filers can contribute the full $5,500 if they earned less than $120,000. This amount will phase out between $120,000 and $134,999. Singe filers are no longer eligible for Roth IRA contributions if they earned more than $135,000.
Earned Income Nuances
Earned income is defined as anything you made from salary, hourly pay, or profits from a small business. Basically, if it’s taxable it counts as earned income. If your earned income happens to be less than $5,500, you may only contribute up to the full amount of your earned income, not the full $5,500. Even if you make no money but your spouse does, you can set up a Spousal IRA and contribute the full $5,500 to both accounts as long as your spouse earns more than $11,000 in a year.
There are a couple of different options when it comes to making contributions. You can contribute the full amount in one payment at any time during the eligible window. Another strategy is what’s called dollar-cost-averaging. This is where you spread your contributions out over the course of the year, whether that’s monthly or quarterly, to average your risks and rewards. By spreading out the contributions you may buy shares when they are priced low or high, but it will average your cost in the end. Since it’s difficult to know when prices will be low, if you contribute all at once, you may be unwittingly buying shares at their highest price point. Dollar-cost-averaging minimizes that risk.
When converting funds to a Roth IRA, there are no contribution or income limits. Therefore, if you already opened a Roth account while you were eligible, you can roll over funds from another account into your Roth, no matter the amount. If you are no longer eligible for contributing directly to a Roth, you can use the “backdoor Roth” strategy to benefit from tax-free distributions at retirement. Keep in mind, however, that you will need to pay taxes on any untaxed funds converted and the funds may count as earned income that could bump you to a higher tax bracket. Always consult your financial advisor before converting funds from one account to another.