Roth IRAs are popular tools used by retirement savers- but how much can you contribute each year? Understanding Roth IRA contribution limits, rules and regulations, and other important details about how these accounts work can help people plan more efficiently for retirement and manage their savings better.
This comprehensive guide covers all this and more- including who can contribute to a Roth IRA, how it may benefit your retirement planning strategy, and advice to help you get more out of this tax-advantaged savings account.
Understanding Roth IRA
Let’s start by outlining what a Roth IRA is, how it works, the benefits it offers, and how it differs from other popular retirement savings accounts.
A Roth IRA is a type of individual retirement account that has slightly different rules from the traditional options. It is an alternative way for people to save for retirement and make the most of IRA tax advantages.
The Concept of Roth IRA
The principal concept of a Roth IRA is an account to which people contribute after-tax dollars in return for tax and penalty-free withdrawals in retirement. Contributions and earnings can grow tax-free, and there are no mandatory requirements at any age.
Roth IRAs are designed to offer more flexibility in retirement planning- particularly for those who want to be able to access their money more easily and decide when- and if- they want to begin making withdrawals.
Benefits of Roth IRA
- Penalty and tax-free withdrawals of contributions at any age
- Penalty and tax-free withdrawals of contributions and earnings after the age of 59 and a half
- No required minimum distributions
- Contributions can be made with after-tax dollars
- Tax-free withdrawals for heirs
- Wide selection of investment opportunities
- Possible qualification for other tax credits
Differences between Roth IRA and Traditional IRA
One of the main considerations people have when exploring IRA options is whether to go for a traditional IRA or a Roth IRA. In many ways, they are similar- but when comparing Roth and traditional IRA, there are a few crucial differences that should not be overlooked.
The first difference is the tax system. Traditional IRAs are funded with pre-tax dollars. Account holders pay taxes when they make withdrawals. Withdrawals are viewed as taxable income and are taxed accordingly. Roth IRA uses after-tax dollars, so you don’t pay taxes on withdrawals- providing tax-free income in retirement.
Another difference worth noting is how withdrawals work. When you have a traditional IRA, you must make withdrawals once you turn 73. The required minimum distribution amount depends on how much is in the account at the time and the owner’s life expectancy. Roth IRAs don’t have any mandatory withdrawals, which is preferable for those who don’t need the extra income or plan to leave the contents of their IRA to their heirs.
Contribution limits are the same for traditional and Roth IRAs. However, traditional IRAs do not have the income limits that Roth IRAs have.
Roth IRA vs. Roth 401(k)
Just because they share a name does not mean these two accounts are like for like. Both accounts may have some similar attributes, but the differences between IRAs and 401ks are significant.
Let’s begin with the crossovers. Both are Roth accounts- meaning they take contributions in after-tax dollars and provide tax-free retirement income to account holders. They both also offer opportunities for tax-free growth on your savings, but that is where the core similarities end.
Roth 401(k) accounts are employer-sponsored retirement plans, while Roth IRAs are self-directed individual retirement accounts. Employers can contribute to 401(k)s but not Roth IRAs. 401(k) plans are usually funded using direct contributions from your salary, with options for employer matching schemes.
Other important differences come with withdrawals. The rules for Roth 401 (k) follow traditional retirement savings accounts- with required minimum distributions after 73 years of age. This does not apply to Roth IRAs.
Furthermore, the investment options available through Roth IRAs are significantly more varied. You also have the bonus of being solely in charge of your funds, portfolio, and investments when you have a Roth IRA.
Many people who sign up for 401(k) plans through an employer end up rolling them over into an IRA (in this case, a Roth IRA). This consolidates their retirement savings and makes them easier to manage- especially when you have a 401(k) from an employer for whom you no longer work. Transferring funds from a Roth 401(k) to a Roth IRA also lets people avoid RMDs when they turn 73.
Roth IRA Contribution Limits
Despite the benefits of a Roth IRA, we must discuss the annual contribution limit for Roth IRA accounts. Below, we explain what limits apply, how they vary depending on certain circumstances, and what may affect the amount you are allowed to pay into your account.
Defining Contribution Limits
A contribution limit simply means the amount you are legally allowed to deposit into a retirement savings account every tax year. Because a Roth IRA- like so many other retirement savings accounts- is advantaged, the IRS caps the amount of money people can contribute.
Current Year Contribution Limits
In the 2024 tax year, the standard Roth IRA contribution limit is $7,000. This is the same as the traditional IRA limit. This is a slight increase from the figure in 2023, which was $6,500.
Contribution Limits for Individuals Under 50
Standard limits apply to anyone under the age of 50. Anyone who earned income in the 2023 tax year who is 49 or younger can contribute up to $6,500- and $7,000 for the 2024 tax year.
Contribution Limits for Individuals Over 50
The maximum contribution to IRAs for over 50s is higher than for under 50s because of an allowance made for catch-up contributions. An additional $1,000 can be deposited annually once you reach 50 as a way to boost savings as retirement draws closer.
As such, the Roth IRA contribution limit for 2024 if you are 50 or older is $8,000. It was $7,500 in 2023.
Historical Contribution Limits
Roth IRA contribution limits have more than doubled in the last 20 years, but the catch-up contribution allowance for over 50s has been set at $1,000 since 2006.
In 2004, the limit for under 50s was $3,000. It rose to $4,000 in 2005, and then to $5,000 in 2008. The limit stayed at $5,000 until 2013- when it increased to $5,500. In the following year, the IRS raised the limit again to $6,000. 2023 was the only year with a limit of $6,500- with the latest figure of $7,000 coming into effect at the start of 2024.
Factors Affecting Contribution Limits
Age is the primary factor that impacts the IRA contribution limits for various accounts- specifically the additional $1,000 allowed for account owners age 50 or older.
There are also specific rules for non-working spouse allowances- which have been equal to the standard limitations for decades. This means a person can contribute double the amount if their spouse does not work and has no pension plan of their own.
Adjustments to Contribution Limits
The whole point of a contribution limit is to ensure that those with higher income levels do not benefit more from tax-advantaged savings than those who earn less. Limits are adjusted based on inflation rates and the rising cost of living- usually in line with the average salary increase.
Roth IRA Income Limits
It is not only contribution limits that apply- there are also limits on how much you can earn and still be allowed to contribute.
Depending on your income, you may be allowed to contribute the full amount, a reduced amount, or nothing at all.
Income Eligibility for Roth IRA
If you earn more than $161,000 per year, you are not eligible to contribute to a Roth IRA. Those who earn between $146,000 and $161,000 can contribute but with a reduced limit. Anyone earning below $146,000 annually can contribute to a Roth IRA up to the standard limit.
There are no minimum income requirements- anyone with any earned income can open and fund an IRA- even minors can have one if they can show earnings.
MAGI and its Impact on Roth IRA
All Roth IRA income limits are based on modified adjusted gross income (MAGI), so it is essential to understand how it impacts you if you are considering this type of account. Please note that it is not the same as adjusted gross income (AGI).
Adjusted gross income is the amount you earn minus certain deductions and expenses. These may include student loan interest, rental losses, health savings deductions, tuition fees, and half of any tax paid as a self-employed person. The exact permitted deductions depend on your circumstances, so it is best to speak with a financial advisor for details.
The difference between AGI and MAGI is the things you can deduct- there are some notable differences. One important difference is that AGI figures deduct any IRA contributions, but MAGI does not. You also need to include rental losses, tuition fees, student loan interest, self-employed tax, and several other things that adjusted gross income discounts.
As such, your modified adjusted gross income is higher than your adjusted gross income. You must work out your MAGI to determine whether or not you can contribute to a Roth IRA- and if so, how much.
Phase-out Ranges for Roth IRA
Phase-out range refers to the window between full contribution limits and no contributions allowed. In 2004, a single filer with a modified adjusted gross income (MAGI) of between $146,000 and $161,000 falls into the phase-out zone.
Depending on where they fall on the scale, people can calculate how much they are allowed to contribute. The calculation for 2024 looks like this:
- Work out your MAGI.
- Deduct $146,000 if you are a single filer- or $230,000 as joint filers (more on that below).
- Take the new amount and divide by $15,000 (single filer) or $10,000 (joint filer)
- If you are younger than 50, multiply the number by $7,000- or $8,000 if you’re age 50 or older.
- Subtract that number from the maximum contribution amount to find out how much you can contribute to a Roth account.
Here is an example of using the calculation to lay things out a bit more clearly.
- Let’s say you are a single filer, aged 40, and your MAGI is $149,000.
- $149,000 – $146,000 = $3,000
- $3,000 divided by $15,000 = 0.2
- Because you are under 50, multiply 0.2 by $7,000 = $1,400
- $7,000 – $1,400 = $5,600
Impact of Filing Status on Roth IRA
There are three categories of contribution limits by tax filing status. How much you can contribute- and earn to be eligible to contribute- depends on what one applies to you.
Across the board, the maximum contribution limits are the same. Where tax filing status comes into play is with the income limits. In other words, your tax filing status doesn’t change the maximum contribution- but it does change what your MAGI can be to qualify for the full limit.
- Single, Head of Household, Married Filing Separately (did not live with your spouse)
This is the first category. If your tax filing status is any of the above, the standard contribution limits apply to you and your Roth IRA savings ($7,000 or $8,000 depending on age if your earned income is less than $146,000, reduced amount if you earn between $146,000 and $161,000, and nothing if you earn more than $161,000).
Single just means unmarried and not responsible for any other qualifying person. You can apply as head of household if you are unmarried but maintain a home for a child or family member (could offer more of a tax break if you qualify).
You can still choose to file separately even if you are married, although most people do not. That said, you can only file under this tax filing status and be eligible for maximum Roth IRA contribution purposes if you did not officially live with your spouse at any time during the tax year.
- Married Filing Jointly or Qualifying Widow (er)
If you file your taxes as a married couple- or meet the requirements to file as a qualifying widow or widower, the income limits are higher overall.
Your combined MAGI must be less than $240,000 to qualify for Roth IRA contributions- and less than $230,000 to be eligible to contribute the full $7,000 ($8,000 if you’re age 50 or older). One person can earn more than the income limit for a single filer and still be eligible to contribute- as long as their spouse’s income is lower and balances it out. Remember- both people should have an earned income.
- Married Filing Separately (lived with your spouse)
The third category is for married couples who live together and want to file separately. There are various reasons people might want to do this, but it will significantly impact your ability to contribute to a Roth IRA. If you file anything over $10,000, you cannot contribute at all. Those who earn less than $10,000 can contribute to a Roth IRA- but with a reduced amount.
Consequences of Exceeding Roth IRA Contribution Limits
All these limits can be a little confusing, and mistakes can be made when it comes to making contributions. Sometimes, for whatever reason, people end up exceeding their annual contribution limit in their Roth IRA.
It can be due to a miscalculation when working out their MAGI- or a misunderstanding about how phase-out limits work. Working with a tax advisor or financial manager is the best way to make sure you have an accurate reported MAGI and know exactly how much you can contribute.
That said, mistakes happen. The IRS rules are pretty strict about people exceeding limits, and penalties apply. Luckily, there are corrective- and preventative- measures you can take to avoid being hit with extra taxes and penalties.
Excess contributions could trigger a tax penalty if they are not corrected on time. Since you already paid tax on the money (this is a Roth IRA we are talking about), there are not the same tax complications as there would be if you paid too much tax-free money.
The penalty tax for excess contributions is 6% for every year it remains in the account.
As we mentioned before, the IRS allows a little leeway for those who over-contribute to a Roth IRA- as long as they correct the mistake before their tax filing deadline. There are three possible solutions for correcting excessive contributions.
- Withdraw the funds
If you realize the mistake before filing your taxes, you can quickly fix the situation by removing the extra. There are no withdrawal penalties on Roth IRA contributions, so this doesn’t trigger anything complex. All you do is simply remove the amount that should not be there.
You must also remove any earnings the excess funds generated while they were in the account- and pay taxes on anything you earned. If you notice very quickly, this shouldn’t be too difficult, but you may need some help from your account manager to ensure this is done correctly. Usually, earnings withdrawn before age 59 and a half carry a 10% penalty, but it is waived in this case- as long as the rules are followed.
If you don’t realize the mistake until after the tax filing deadline, you can file for an extension. You then have six months to remove the contribution and relevant earnings- and pay the tax you owe on said earnings.
- Deduct the Excess from the Following Year’s Contribution
One option for those who miss the deadline to withdraw (or decide it is not what they want to do) is to leave the funds in the account. The following tax year, they can reduce their annual contribution limit accordingly. Say they contributed $500 over the limit this year- next year, they make sure to deposit at least $500 below the limit.
This is an easy fix, but it is not without penalties. Every year extra funds stay in the account, and you pay 6% tax on the amount. As long as you rectify it the next year, you only need to pay it once. If the amount is small and you can ensure the mistake is not repeated, this is a good option.
- Convert the Funds to a Traditional IRA
You can also recharacterize excess funds by directing your IRA broker to move the extra out of the Roth IRA, and into a traditional IRA. This can be done through a same-trustee transfer if you hold accounts with the same financial institution or a trustee-to-trustee transfer if not.
As long as this is done before the tax deadline, the IRS will ignore the Roth IRA contribution and characterize it as a contribution to the second IRA.
Avoiding Excess Contributions
Prevention is better than cure- and it is best to avoid over-contributing altogether if you can help it.
One of the main reasons most people end up contributing too much is underestimating how much they will earn that tax year. People may assume they will be below the income limit for the maximum contribution, but by the time it comes to tax filing, they realize they are wrong.
You can avoid excess Roth IRA contributions by holding off on maxing out your deposits until closer to the end of the tax year. That way, you have a more accurate picture of your actual earnings. Many people make their annual Roth IRA deposit just before the end of the tax year as part of their annual financial planning.
Keep up to date with the income limits and how they impact Roth IRA allowance. It also helps to work with a financial advisor to ensure your MAGI is calculated correctly.
Roth IRA Eligibility and Rules
Here is an overview and summary of the eligibility criteria and rules for a Roth IRA.
Eligibility Criteria for Roth IRA
- You must have earned income during the tax year to qualify for a Roth IRA.
- If you earn more than $161,000 (MAGI), you cannot contribute.
- Those who earn less than $146,000 (MAGI) can contribute up to the maximum limit of $7,000 ($8,000 if you’re age 50 or older).
- If you earn between $146,000 and $161,000, you can contribute up to a phased limit.
- Single, head of household, married filing separately (not living together), married filing jointly, and qualifying widow (er) are all eligible tax filing statuses for Roth IRA contributions. You may still be eligible if you are married filing separately while living together, but only if you earn less than $10,000.
- You cannot contribute more than you earned in taxable income. If you only earned $5,000, you can only contribute $5,000.
Roth IRA Withdrawal Rules
- By understanding IRA withdrawal conditions, you can withdraw Roth IRA contributions at any time without paying penalties or taxes.
- Earnings on contributions can be withdrawn penalty-free after age 59 and a half. Early withdrawals are taxable and carry an additional 10% penalty.
- There are no required minimum distributions on Roth IRAs.
- Beneficiaries of Roth IRA accounts are subject to RMDs.
Changes in Roth IRA Rules
Here are some recent changes to the Roth IRA rules- laid out in the Secure Act 2.0 at the end of 2022- that may be worthwhile knowing.
- The lifetime Roth IRA rollover limit is $35,000.
- SIMPLE and SEP IRA plans can now accept Roth contributions.
Contribution limits change sometimes. It increased from $5,500 and $6,000 to $6,500 and $7,000 at the beginning of 2024.
Special Considerations for Spouses
There are special considerations for married couples with only one income-earning spouse. In this case, the working spouse can contribute to their own Roth IRA and the IRA of their partner. The non-working spouse must be eligible to have an account- meaning they were earning at some point.
A spousal IRA is not a specific type of account- it is just a consideration. The Roth IRA will be held in the name of the non-working spouse, but the working spouse can contribute to it based on their own income.
The point of this is to allow couples to save for retirement even when one is out of work. Examples include parental leave, after the loss of a job, or any personal reason one person is no longer working.
Couples must be married and filing jointly.
Planning Your Roth IRA Contributions
Whenever you contribute to a Roth IRA, you reap tax benefits- but there are ways to get more out of your account. A little bit of planning goes a long way. Here are some tips to consider.
Timing Your Contributions
You can contribute to a Roth IRA at any time, provided you earned money during that tax year. However, there are some timing choices that can help.
Because you contribute after-tax dollars, it is a good idea to contribute as much as you can when you are in a low tax bracket- and when federal income taxes are generally favorable. The earlier you start, the more time you have to build the fund.
Maximizing Tax Benefits
The best way to make the most of tax benefits is to come up with a structured strategy based on your earnings. What works for one person does not necessarily work for another, but a financial advisor can provide tailored advice.
Generally speaking, you can maximize tax benefits by using multiple account types. Having a Roth and traditional IRA provides flexibility (traditional IRA contribution limits are the same as Roth), and you could also consider using different Roth savings plans.
Record Keeping for Roth IRA Contributions
Detailed record keeping is not essential by law, but it is highly recommended. Whether you do it yourself or through a financial manager, it is worth keeping track of contributions, payments, taxes, and distributions.
Unlike most tax records, which are generally kept for three years, Roth IRA records should ideally be held for as long as the account is active. It helps with retirement planning- and comes in handy for a beneficiary should the account holder die while there is still money in the account.
Here are some of the things to record.
- All annual contributions
- Any distributions made
- Proof of taxes paid on contributions
- Conversions between account types (including other IRAs or pension plans)
- Any relevant paperwork relating to the account and its contents
Future Financial Needs and Roth IRA
One of the key benefits of a Roth IRA is the fact that you don’t have to withdraw the money if you don’t want to. At the same time, you have easy access to your contributions at any age should you need them.
Because of this, Roth IRAs are great choices for those who:
- Believe they may need to dip into their Roth IRA savings before retirement
- Don’t think they will need the extra income during their retirement and want to leave it to beneficiaries
It is also better if you think you will be in a higher tax bracket later in life- since Roth contributions become tax-free income later.
Perspectives on Roth IRA Contributions
- Taxpayer Perspective
Everyone appreciates a tax break where they can get it. Although Roth IRAs don’t make much difference to taxes when you make contributions, they leave you with tax-free income in retirement. If you are in a low tax bracket now but expect it to rise, this is a good time to put whatever money you can into your Roth IRA.
- Financial Advisor Perspective
Financial advisors share the perspective of their clients to a point, and Roth IRAs are popular choices for people who want control and flexibility with their retirement savings. A financial advisor can help people make the most of Roth IRAs- and understand their limitations.
- IRS Perspective
The IRS approves Roth IRAs. In some ways, it is better for them because there are no delayed tax payments. That said, the IRS limits contributions for high earners to make it fairer on those who earn less- maintaining a little more equality in tax-advantaged savings.
- Retirement Planner Perspective
A retirement planner looks at the best way to set someone up for the later years of life when they no longer work. Tools such as Roth IRAs are important for optimizing tax advantages and giving people varied ways to prepare themselves and put themselves in a good position.
Frequently Asked Questions
- What happens if I contribute more than the Roth IRA limit?
Mistakes and miscalculations happen, which can result in an over-contribution to a Roth IRA. If this happens, there is a 6% tax penalty each year that the excess contributions remain in the account. Luckily, the IRS gives you time to rectify the situation.
You can withdraw the excess or carry it over to the following year’s contribution limit. Just remember to adjust the amount you contribute the next year accordingly.
- Can I contribute to a Roth IRA at any time?
The latest you can contribute to a Roth IRA for a certain year is your tax filing deadline date- mid-April for most people.
- What is the 5-Year Rule for Roth IRAs?
Roth IRAs have certain restrictions on when you can withdraw, convert, or inherit funds without incurring penalties. There are technically three five-year rules relating to Roth IRAs.
- You can withdraw contributions at any time without paying a penalty, but earnings generated in the Roth IRA cannot be withdrawn penalty-free until they have been in the account for five years.
- If you convert funds from a traditional IRA to a Roth IRA, you also need to wait five years if you want to avoid penalties.
- Although Roth IRAs have no required minimum distributions for the original account holder, they kick in if the account is bequeathed to a beneficiary. However, the five-year rules stand for withdrawals and converted contributions.
- Can a minor contribute to an IRA?
Anyone with earned income can contribute to an IRA- it doesn’t matter how old they are. That said, an adult must act as custodian for the account until they come of age. Minors have the same annual contribution limit as other under 50s- $6,500 for 2023 and $7,000 for 2024.
- Can I get a company match on my IRA contributions?
Employers can match contributions in SIMPLE IRAs, but traditional and Roth IRAs are individual and only generally contributed to by the account owner.
If you earn less than $146,000, the Roth IRA contribution limits are $7,000 for under 50s and $8,000 for over 50s. Limits are phased based on earnings up to $161,000. Earn more, and you are not eligible to contribute.
The most important points to remember are:
- Income limits are based on modified adjusted gross income.
- You have time to correct over contributions- but you will pay 6% tax per year if you don’t.
- The earning limits depend on your tax filing status.
Roth IRAs offer many benefits to those who are eligible- and are certainly worth considering as part of a retirement planning strategy.