What are the Roth IRA contribution rules?
You need to know before you make your annual contribution. Otherwise, you risk making an excess contribution which will incur an annual penalty until corrected.
In short, you need to make note of the following factors in regard to your contributions:
* Type of earned income
* The income limits
* The contribution limits
* The contribution deadline
Let’s examine each factor on an individual basis…
Type of Earned Income
Your ability to make a Roth IRA contribution is contingent on the amount and type of income you have. You can’t make a contribution which exceeds your annual modified adjusted gross income, and the type of income you contribute must be “earned income.”
In other words, you can NOT make a $5,000 Roth IRA contribution if your total earnings for the year are $4,000.
You also can not contribute income from pensions, disability payments, rental property income, dividends, interest, or other types of passive income. The only income eligible for a contribution is income you earn during the course of the tax year for providing products or services.
The Income Limits
Your ability to make a Roth IRA contribution also faces a maximum income threshold.
In other words, if you earn too much, you’re barred from making any Roth contributions for the year.
The maximum income threshold is…
* $176,000 if you’re married and file a joint tax return
* $10,000 if you’re married, lived with your spouse for any part of the tax year, yet you filed a separate tax return
* $120,000 if you file as single, head of household, or married filing separately and did not live with your spouse for any part of the tax year
If you earn more than the aforementioned amounts, you can NOT make a Roth IRA contribution.
If you earn less, the amount you can contribute varies according to your income. However, most people qualify to make the maximum annual contribution.
The Contribution Limits
So what are the maximum annual contribution limits?
Those also vary according to your age.
The maximum annual Roth IRA contribution limit is…
* $5,000 if you’re under age 50
* $6,000 if you’re age 50 or older
By allowing those who are 50 or older to make larger annual contributions, it helps people to effectively make “catch-up” contributions to adequately fund retirement.
The Contribution Deadline
You also need to make sure you meet the Roth IRA contribution deadline, which is the same as the deadline for filing your taxes: April 15th.
This means you can make an annual Roth IRA contribution up until April 15th of the following year.
For instance, let’s say you want to make a contribution for the year 2012. You can do so anytime between January 2, 2012 and April 15, 2013.
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