Roth and Traditional IRA Income Limits – Can I Contribute?

Unfortunately, not everyone is eligible to stash their money away in an IRA or deduct it from their income taxes. The Internal Revenue Service (IRS) can’t have people hiding too much of their income in tax-sheltered savings. Therefore, there are certain Roth and Traditional IRA income limits put in place to regulate who is able to use them to their full extent.

Knowing what these limits are and if you qualify will help you make informed decisions about how you plan to use your IRA vs 401k investments.  In fact, as you read below, we’ll also address a common misconception about whether or not you can use an IRA to stash your savings, and how this can benefit your nest egg.

Your IRA income limits and deduction abilities are based on your modified adjusted gross income (MAGI). That’s a number you calculate when you perform your Federal income tax returns each year.

For each type of IRA and sub-category below, the lower number represents the threshold at which you can no longer contribute the maximum or full amount. As your MAGI gets closer to the larger number, the amount you can contribute gradually phases out until it finally reaches $0 and you are no longer eligible to participate.

 

2013 Roth IRA Income Limits:

The following are the IRS upper income limits to be able to contribute to a Roth IRA:

• Married Filing Jointly or Qualified Widow: $178,000 to $188,000

• Single, Head of Household or Married Filing Separately (and you did not live with your spouse): $112,000 to $127,000

• Married Filing Separately (and you lived with your spouse at any time during the year): $0 and $10,000

 

2013 Traditional IRA Income Limits:

Your ability to deduct a Traditional IRA from your income taxes will be determined by your income and whether or not you and/or your spouse are covered by a retirement plan at work (like a 401k or 403b)

If you DON’T take part in an employer-sponsored retirement plan, the upper income limits are:

• Single, head of household, or qualifying widow(er): Any income level

• Married filing jointly or separately with a spouse who is not covered by a plan at work: Any income level

• Married filing jointly with a spouse who is covered by a plan at work: $178,000 to $188,000

• Married filing separately with a spouse who is covered by a plan at work: $0 and $10,000

If you DO take part in an employer-sponsored retirement plan, the upper income limits are:

• Single or head of household: $59,000 to $69,000

• Married filing jointly or qualifying widow(er): $95,000 to $115,000

• Married filing separately: $0 and $10,000

 

The Difference Between Contributing and Deducting:

Important!  Did you notice the words Deduct and Contribute were highlighted above?  There is a very important and often misunderstood distinction between the two terms.

If you make a lot of money (and exceed the limits above), you can NOT contribute to a Roth IRA.  Period.

However, if you make a lot of money (and exceed the limits above), you CAN still contribute to a Traditional IRA.  You just can’t deduct it from your income taxes.

Being able to deduct it from your taxes means that the money you contribute won’t be credited it against your MAGI.  To put it simply, you’ll pay taxes on your contributions.

But all is not lost.  Being able to contribute to an IRA at all still has two very important advantages:

1. You’ll still benefit from being able to invest your money and letting it grow tax-free until you finally withdrawal for retirement.  This is a triumph over a regular brokerage account where you’d just end up paying taxes on your earnings every year.

2. You have the option to convert your Traditional IRA to a Roth after a certain amount of time.  So by a loophole, you can still make a lot of money and contribute to a Roth IRA.

 

Minimum IRA Income Limits: 

One final note:If you’re a lower income earner, the IRS says you cannot contribute more to your IRA than you earned in a single year. So for example, if you only made $2,500 in taxable compensation, then you cannot contribute more than $2,500 to your IRA.

Part of being able to contribute to an IRA is having taxable compensation.  That means actually making money from working.  So for example, if you want to set aside money for your young child and think an IRA might be the way to go, think again.  You’re not allowed to start an IRA for your young child who does not have taxable income from an employer.

 

Photo Credit: Microsoft Clip Art