A Roth individual retirement account provides advantages to taxpayers who expect their income to decline after retirement. Contributions to Roth IRAs are taxed before the money is put into the account, but the money grows tax-free, and withdrawals after age 59 1/2 are exempt from income taxes. This is a benefit for taxpayers who can afford taxes now but may be less able to later.
Limits Based on Income
There are income limits for contributions to Roth IRAs, based on a taxpayer's compensation. The modified adjusted gross income calculation for purposes of determining eligibility to contribute to a Roth IRA includes pay for work you perform, including wages or salaries, tips or bonuses, commissions or self-employment earnings.
The maximum contribution to a Roth IRA for 2013 is $5,500 a year, with another $1,000 allowed for a contributor over age 50. Single taxpayers with incomes up to $112,000 and married taxpayers filing jointly with combined income up to $178,000 can make full contributions. Couples can have a Roth IRA for each spouse, and a working spouse can contribute to a nonworking spouse's Roth IRA provided the working spouse has enough earned income to do so.
The upper limit for contributions to Roth IRAs in 2013 is $127,000 for single taxpayers and $188,000 for married couples filing jointly. A taxpayer who qualifies as head of household or married filing separately and who did not live with his spouse at any time during the year falls in the same category as single taxpayers. A married taxpayer filing separately who lived with his spouse during the year cannot contribute at all if his income exceeds $10,000.
Incomes between the lower and upper limits are in a "phase-out" area, meaning that a person can contribute some money to a Roth IRA, but not the full amount. Contributions are reduced gradually as incomes go up and must be figured on an Internal Revenue Service worksheet. The amount of reduction will vary with each taxpayer. Not affected by income limits, however, are any rollovers from traditional tax-deferred IRAs, although that money may be subject to tax as ordinary income.
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