Over time, you earn interest on it and, after you turn 59 1/2, you can withdraw your savings and earnings tax-free. The amount you can contribute is updated each year, along with other specifications of the account.
As for who can contribute, “Anyone can open a Roth IRA provided they have earned income for the year, and their earnings are under the IRS-imposed phaseout limits,” explains Ryan Repko, MBA, Financial Advisor at Ruedi Wealth Management, Inc.
“Thankfully, the Roth IRA phaseout limits are relatively high,” he adds, “so the vast majority of Americans can contribute to a Roth IRA.”
But the big question is, how much money can you put into a Roth IRA each year? Here’s everything you need to know about Roth IRA contribution limits straight from financial experts across the U.S.
Roth IRA contribution limits for 2018
Repko says, “According to IRS Notice 2017-64, the Roth IRA contribution limits for 2018 remain unchanged from 2017. If you are less than 50 years old, you can contribute up to $5,500 per year and, if you’re 50 or older, you can contribute $6,500 per year.”
Here’s a look at how the contribution and income limits have changed over the past four years:
What happens if you put too much in Roth IRA? You may be subjected to additional fees and unwanted attention from the IRS.
What are the contribution limits?
The limits are stated in the chart above. Repko explains, “If you are married and filing jointly on your tax return, and your modified adjusted gross income (MAGI) is less than $189,000, then you can contribute the full amount ($5,500 per year for those under 50, and $6,500 per year for those who are 50 or older).
But this contribution amount is phased out over the next $10,000 of MAGI. If your MAGI is above $199,000, you cannot contribute to a Roth IRA at all. If your income lies somewhere in between, you can contribute to a Roth IRA, but not the full amount.”
He adds, “If you file a single tax return, and your MAGI is less than $120,000, then you can contribute the full amount ($5,500 per year for those under 50 years old, and $6,500 per year for those 50 and older), but you are phased out from making a contribution at $135,000.”
Since 2017, the limits have increased by $3,000 for those who are married filing jointly and $2,000 for single filers.
2018 contribution limits for a Roth IRA and traditional IRA combined
You may be wondering how much you can contribute to a Roth IRA and traditional IRA combined.
Repko explains, “The contribution limits are the same for a traditional and a Roth IRA, and any combination of contributions to both accounts is subject to the same limits.
For example, if a person under the age of 50 contributes $3,500 to their traditional IRA, they can only contribute $2,000 to their Roth IRA for that tax year, because their combined contributions cannot exceed $5,500.”
Traditional IRA income limits
There are no income limits on traditional IRA accounts. However, your MAGI will determine if your contributions are tax-deductible.
See the chart below for the 2018 limits:
When is the Roth IRA contribution deadline?
“You can contribute to a Roth IRA any time throughout the year and have it count for that year. Also, you have until tax day to make a contribution to a Roth IRA and still have it count for the previous year. For example, you have until April 17, 2018, to make your Roth IRA contribution and still have it count for 2017,” says Repko.
How to work around the Roth IRA income limit
Can you still reap the benefits of a Roth IRA account if your income is higher than the Roth IRA limits? Yes, you can.
According to Matthew Stewart — CFP®, ChFC®, President and wealth advisor at Forestview Financial Partners — there is a workaround.
“High-income earners can indirectly contribute by using what’s come to be known as the Backdoor Roth IRA contribution. First, you make a ‘non-deductible’ contribution to a traditional IRA,” says Stuart, “and then immediately convert it to a Roth IRA (since there isn’t an income limit on traditional IRAs or conversions).”
“The conversion makes the most sense when all of your IRA money is considered after-tax contributions. That way, none of the money is taxed,” adds James Robert Schramm, financial advisor at Schramm Financial Group.
You may be wondering, is this legal?
Stewart explains, “Before the passage of the new tax reform law, tax professionals and advisors worried that, at some point, the IRS would disallow or ‘unwind’ these transactions,” Stuart explains, “arguing that this two-step process violates what’s known as the ‘step transaction doctrine.’
However, Congress included four footnotes in the Conference Committee Report explanation of the Tax Cuts and Jobs Act, which essentially blesses these transactions.”
There are several important details about this conversion such as the deadlines and tax implications, so it is best to discuss it with a financial expert.
A change to IRA conversion reversals in 2018
For those who are interested in converting traditional IRA funds into a Roth IRA, the rules have changed this year.
Henry Stimpson, APR at Stimpson Communications says, “You no longer have the option of waiting until October of the following year to decide whether to reverse IRA conversions. As of 2018, any conversion is irrevocable.”
Stewart explains, “The Tax Cuts and Jobs Act repealed the ability for a taxpayer to ‘recharacterize’ a previously converted Roth IRA, whereby taxpayers were able to undo a previous Roth conversion if they changed their minds.
Taxpayers are no longer allowed to undo these. Once they decide on a conversion, they are stuck with it.”
Stimpson adds, “Because of this, it’s important to make sure you understand the tax consequences of a conversion and are comfortable with them. For many people, it will make sense to wait until year-end to decide whether to convert IRA assets.
There was much more flexibility before, making conversions more of a win-win proposition. Now, if you convert and the value of your investments drop, or the conversion pushes you into a higher tax bracket, there’s nothing you can do about it.”
Are there liquidity constraints on the money in your Roth IRA account?
Yes and no.
Stephen C. Bene, financial advisor and co-founder of Beneficial Wealth, explains, “The one little-known fact is that the IRS does allow you to access whatever you’ve put into your Roth IRA without penalty.
But to access the growth on your contributions tax-free and penalty-free, your Roth IRA must have been open for at least five years, and you must be at least 59 ½.”
He adds, “The ability to access what you’ve contributed to a Roth IRA is one of the major differences between a Roth IRA and a traditional IRA. With a traditional IRA, you cannot take out what you contributed before you turn 59 ½, without a penalty and taxes due.
However, once money has been withdrawn from a Roth IRA, it cannot be paid back. You will have effectively forfeited your ability to grow the money you distributed on a tax-free basis for the rest of your life.”
Should you invest in a Roth IRA account?
Roth IRA accounts offer many benefits and can be a nice boost to your retirement.
Stimpson advises, “Roth IRA contributions should be invested aggressively. Because assets in the account are tax-free, you’re better off holding conservative investments in other types of accounts.
By investing aggressively, your Roth IRA can grow for the long-term, which will boost your retirement and also possibly leave more for your heirs.”
To learn more about Roth IRA accounts and other investment options, review and compare the top wealth management firms today.