ROTH  IRA CONTRIBUTIONS

Like traditional IRAs, persons who earned income during the year may open a Roth IRA.  However, unlike traditional IRAs, there is no maximum age limit on Roth IRAs.  Individuals over age 70½ who have earned income for the year may open and contribute to Roth IRAs.  For retirees who continue to work part-time, Roth IRAs may be their only available IRA option.

The same general contribution limit applies to Roth IRAs: the lesser of:

100% of earnings or
$5,000 (in 2011 ).  

Those age 50 or older may contribute an additional $1,000 as a "catch-up" provision.  

The maximum total yearly contribution that can be made by an individual to all IRAs  - that is, all deductible and nondeductible, traditional IRAs as well as Roth IRAs - is $5,000, or $6,000 in the case of older contributors (excluding rollover contributions).

The following discussion assumes Roth contributors are under age 50 unless noted otherwise.



 Income Limits

Unlike traditional IRAs, the tax code prohibits certain high income workers from contributing to a Roth IRA.  

Single taxpayers who earn under $95,000 may contribute the full $5,000 to a Roth IRA.  The Roth IRA contribution is phased out (i.e., partial contributions) for single taxpayers earning between $95,000 and $110,000.  Single taxpayers earning $110,000 or more may not contribute to a Roth IRA - adjusted for inflation ($107,000 and $122,000 in 2011). Single taxpayers earning $122,000 or more in 2011 may not contribute to a Roth IRA.  

For married couples filing jointly, a full $5,000 Roth IRA contribution is available for those earning under $150,000 ($169.000 in 2011).  The Roth IRA contribution is eliminated for those having incomes of more than $160,000 ($179,000 in 2011) with partial contributions allowed for married couples earning between those levels (between $169,000 and $179,000 in 2011).

Taxpayers who do not qualify to make a full Roth IRA contribution may still contribute to non-deductible traditional IRAs instead (if under age 70½ ).



Example:

Mary McDonough, a single taxpayer with adjusted gross income of $135,000 in 2011, is ineligible to contribute to a Roth IRA because her income exceeds $122,000. However, she may contribute to a traditional IRA.

Example:  

Jim and Bobbi Holmes, a married couple both working in 2011, earned $175,000 jointly.  They may make a "partial" contribution to a Roth IRA.  The phaseout for married couples disallows 50 cents for every $1 of earnings in excess of $169,000.  For, Jim and Bobbi the disallowance is $6,000 x .50 or $3,000.  They may each contribute up to $2,000 ($5,000 maximum - $3,000 disallowance) to a Roth IRA for 2011.  The remaining $3,000 may be contributed into traditional IRAs.


To be treated as a Roth IRA, the account must be designated as such when it is established.  Funds in a Roth IRA must be held separately from funds contributed to traditional IRAs.  So unlike traditional IRA accounts that can hold both deductible (before-tax)  and non-deductible (after-tax) contributions, taxpayers must establish a separate IRA account for their after-tax Roth IRA contributions.



 Excess contributions

As with all IRAs, funds contributed in excess of the annual total dollar limits are subject to a 6% penalty tax.  However, with Roth IRAs there is a new twist. Taxpayers are also subject to the 6% penalty tax for contributions to Roth IRA in excess of the Roth income limitations above.


Example:

 Tag Adams, a single taxpayer, contributes $5,000 to a Roth IRA for 2011.  He earns $137,000 in 2011.  Although he does not exceed the $5,000 maximum permissible contributions, he is not eligible to contribute to a Roth IRA due to his income.  The $5,000 excess Roth contribution is subject to a 6% penalty, unless he withdraws it before his tax filing date.  He could redeposit those funds in a traditional IRA.
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As with all IRAs, the taxpayer may "cure" an excess contribution by withdrawing the excess at any time before the tax filing deadline.  In these cases, taxpayers avoid the 6% penalty.  Taxpayers may also correct the situation by underfunding future contributions - this does not eliminate the 6% penalty this year, but does avoid the cumulative nature of the penalty in the future.