Roth IRA Explained

Roth IRA is a great vehicle if you’re eligible. Unfortunately, there are certain income restrictions that may prevent you from participating. There is both a lower limit and a higher “range” that may exclude you from participating in this tax-free investment vehicle popularized in the last decade.

Lower Income Limit

The lower income limit refers to how you must earn income in order to contribute it to a Roth IRA. The 2008 annual contribution limit for Roth IRAs is $5,000, with a $1,000 catch-up contribution for those aged 50 and above. Every dollar you contribute must have been earned in that year, so if your tax return filing says you earned $500 (after taxes) this year then you may only contribute $500 this year.

The $500 you contribute does not necessarily have to be the $500 you earned. One example is for children. If they earned $500 but spent it on candy, parents can elect to give them $500 to contribute.

Upper Income Range

There is a phase-out range for the upper limit, where the $5,000 contribution limit is slowly phased out in $20 increments. The phase for Single tax filers begins at $101,000 and ends at $116,000. If you earn less than $101,000 then you can contribute the full $5,000. If you earned more than $116,000 then you can’t contribute anything. Within that $101k to $116k, simply figure out how far into the range you are and apply that percentage to the contribution limit – rounding up to the nearest $20. The limits are different for other filing statuses (Traditional and Roth IRA Contribution Limits).