We love the ROTH retirement savings because, why wouldn’t you? You have no required minimum distribution, you don’t pay tax on distributions in retirement and you can keep putting money into them long after you are disallowed from saving in traditional retirement vehicles. So, it’s not too late to take advantage of ROTH retirement contributions for 2016- as long as you follow some rules! Below are some guidelines to help you navigate the ins and outs of ROTH contributions:
Whether or not you can contribute depends on your filing status and modified adjusted gross income (MAGI). income- if don’t have earned income or if you have too much, you can’t give to a ROTH.
To make a contribution, you have to must either:
Earned income is defined by the IRS as:
Wages, salaries, tips, and other taxable employee pay;
Union strike benefits;
Long-term disability benefits received prior to minimum retirement age;
Net earnings from self-employment if:
How much can you contribute?
The maximums are:
$5,500 annually, or $6,500 if you're age 50 or older with some caveats:
You are limited to contributing no more than your earned income (for example, if you only had earned income of $3000, you cannot contribute more than that amount).
Your contribution can be reduced based on your MAGI. For a single person, the phase out begins at $117,000 with no contributions allowed with MAGI over $132,000. For married, filing jointly, the reductions begin at $184,000 and completely phase out at $194,000, and for married, filing separately the phaseout starts immediately with $1 of income, with no contribution allowed after $10,000.
You must contribute your 2016 dollars by the tax filing deadline of April 18, 2017.
If your spouse doesn’t have income, the working spouse can contribute up to their income minus any Roth IRA contributions made on behalf of the working spouse. For example, if the working spouse makes $10,000 and contributes $5,500 to an IRA, the non-working spouse can only contribute $4,500 ($10,000-$5,500).
If you have more than one IRA (for example a traditional and a Roth), your total combined contribution to all your accounts cannot exceed the maximum contribution amounts to all IRAs.
If your income doesn't qualify, you can do a “backdoor” contribution, by rolling over funds from a Traditional IRA, but there are some extra taxes and fees involved.
If you exceed the contribution limits, you may face a 6% penalty, so be aware of where you stand and talk to your tax and financial advisors.