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Tutorial: Roth IRA Contributions

 

A regular contribution is deemed to be any monetary additions which an individual makes to his Roth IRA account based on his annual income or compensation. For instance, if an individual earns $50,000 for the year, he may make Roth IRA contributions based on that income.

An individual must meet two requirements in order to be eligible to make a regular Roth IRA contribution. These are:

 

 

  1. The individual must have eligible compensation. For a description of what is considered eligible compensation, see Eligibility for Roth IRA Contributions under Who Can Establish and Fund a Roth IRA: Eligibility Requirements.
  2. The individuals modified adjusted gross income (MAGI) must not exceed the following limits:
 
The following chart also shows the percentage of contributions allowed, when the individual’s MAGI falls into the phase-out range. For 2009, 100% is $6,000 for someone who is at least age 50 by December 31, 2009 and $5,000 for someone is not age 50 by December 31, 2009.
 
Tax Filing Status
2009 MAGI
2008 MAGI
Allowed contribution 
Single
$105,000 or less
$101,000 or less
100%
$105,000  - $120,000
$101,000 - $116,000
Partial
$120,000  or more
$116,000
None
Married filing jointly
$166,000 or less
$159,000 or less
100%
$166,000 -$176,000
$159,000 - $169,000
Partial
$176,000 or more
$169,000 or more
None
Married filing separately
Less than $10,000
Less than $10,000
Partial
$10,000 or more
$10,000 or more
None
 
 
Spousal IRA Contributions
 
If a married individual has little or no income/compensation, he can still make regular Roth IRA contributions based on the income of his spouse, providing the following requirements are met:
 
  • The couple must file a joint tax return
  • The working spouse must have sufficient income or compensation to cover the contribution. If contributions are being made for both spouses, the compensation must be sufficient to cover both contributions
  • The contribution to one of the spouse’s Roth IRA cannot exceed the statutory limit in effect for the year.  See ‘Contribution Limit’ below
 
Spousal IRA contributions are-by definition- regular IRA contributions, and as such, are subject to the same rules, regulations and operational & compliance requirements.  
 
Contribution Limit
An individual may contribute up to 100% of eligible compensation to his Roth IRA, providing the contribution does not exceed the limit in effect for the year. The contribution limits as of 2002 are as follows:

Year
IRA contribution  limit
Catch-up contribution limit
2002
$3,000
$500
2003
$3,000
$500
2004
$3,000
$500
2005
$4,000
$500
2006
$4,000
$1,000
2007
$4,000
$1,000
2008
$5,000
$1,000
2009
$5,000
$1,000

 
Catch-Up Contributions
Individuals who are at least age 50 by the end of the year can make additional contributions, referred to as catch-up contributions. For instance, an individual who is age 50 or older by December 31, 2009 can make a total contribution of $6,000.
 
Computing Contributions for the Phase-out Range
 If an individual’s MAGI falls within the phase-out range, a calculation must be done to determine the contribution amount to which the individual is eligible. If tax-preparation software is used, it is likely that the software will compute the amount. If the calculation has to be done manually, the following steps should be used:
 
  1. Subtract the lower dollar amount in the range from the individual’s MAGI
  2. Divide the result by the difference between the lower and the higher amounts in the range
  3. Multiply the result by the maximum contribution amount in effect for the individual for the year
  4. Subtract the result from the maximum contribution amount in effect for the individual for the year
 
The result is the amount that the individual is allowed to contribute to a Roth IRA. 
 
For example:
o   Assume you are under age 50 by the end of the year, which makes your maximum contribution $5,000
o   Assume also that your MAGI is $108,000 and your tax filing status is single which makes the applicable range $105,000 to $120,000.

Step 1
108,000 - 105,000              = 3000
Step 2
3,000/(120,000 -105,000) =
3000 / (15,000)                  =0.20
Step 3
0.20 X $5,000                   = $1,000
Step 4
$5,000- $1,000                  =$4,000
You are eligible to contribute $4,000 to you Roth IRA
Note:  If the result is not divisible by $10, round the amount up to the nearest $10

 
 
Contributions Must Be Made in Cash
 
Regular Roth IRA contributions must be made in cash[1]. For this purpose, cash includes direct deposits from tax refunds, checks, money orders and payroll deductions.
 
Roth IRA Contributions are Not Deductible
 
Roth IRA contributions are not deductible. Therefore, contributions to a Roth IRA are not affected by an individual’s participation in an employer sponsored retirement plan. This is unlike the case of a traditional IRA, where an individual’s participation in an employer sponsored plan could result in the individual being an active participant. The individual’s active participant status could affect his eligibility for taking a deduction for his traditional IRA contribution.
 
 

 

[1] IRC§ 408(a)(1)
 
 
 
                    I.            Tutorial: Roth IRA Contributions
                  II.            Tutorial: Excess Roth IRA Contributions
                III.            Tutorial: Roth IRA Conversions
               IV.            Tutorial: Roth IRA Reconversions
                 V.            Tutorial: Roth IRA Rollovers and Transfers