Roth IRAs: Eligibility Requirements
AAA
  1. Roth IRAs: Introduction
  2. Roth IRAs: Eligibility Requirements
  3. Roth IRAs: Contributions
  4. Roth IRAs: Distributions
  5. Roth IRAs: Conclusion

Roth IRAs: Eligibility Requirements

Who Can Establish a Roth IRA?
Any individual who has taxable compensation or self-employment income (earned by sole proprietors and partners) for the year may establish and fund a Roth IRA. To be eligible to make a regular contribution, the individual must have a modified adjusted gross income (MAGI) that is less than a certain amount, depending on the tax-filing status of the individual. Here are the base MAGI limits for 2013:

Roth IRA MAGI Limits 2013

  • $188,000 for individuals who are married and file a joint tax return
  • $10,000 for individuals who are married, lived with their spouses at anytime during the year, and file a separate tax return
  • $127,000 for individuals who file as single, head of household, or married filing separately and did not live with their spouses at any time during the year

Establishing a Roth IRA
A Roth IRA must be established with an institution that has received IRS approval to offer IRAs. These include banks, brokerage companies, federally insured credit unions and saving & loan associations.

A Roth IRA can be established at any time. However, contributions for a tax year must be made by the IRA owner's tax-filing deadline, which is generally April 15 of the following year. Tax-filing extensions do not apply. (For background reading, check out An Introduction To Roth IRAs.)

There are two basic documents that must be provided to the IRA owner when an IRA is established:

These provide an explanation of the rules and regulations under which the Roth IRA must operate, and establish an agreement between the IRA owner and the IRA custodians/trustee.

Compensation Defined
For individuals working for an employer, compensation that is eligible to fund a Roth IRA includes wages, salaries, commissions, bonuses and other amounts paid to the individual for services the individual performs for an employer. At a high level, eligible compensation is any amount shown in Box 1 of the individual's Form W-2.

For a self-employed individual or a partner in a partnership, compensation is the individual's net earnings from his or her business, less any deduction allowed for contributions made to retirement plans on the individual's behalf, and further reduced by 50% of the individual's self-employment taxes.

Other compensation eligible for the purposes of making a regular contribution to a Roth IRA includes taxable amounts received by the individual as a result of a divorce decree.

Ineligible Compensation
The following sources of income are not eligible compensation for the purposes of making contributions to a Roth IRA:

  • rental income or other profits from property maintenance
  • interest and dividends
  • other amounts generally excluded from taxable income

Income Limits
Individuals whose MAGI falls within a certain range may not be able to contribute the full contribution limit. These individuals must use a formula to determine the maximum amount they may contribute to a Roth IRA.

Here is a chart outlining the ranges for each tax-filing category:

Category Income Range for 2013
Married and filing a joint tax return. At least $178,000 but less than $188,000.
Married, filing a separate tax return and lived with spouse at any time during the year. More than zero but less than $10,000
Single, head of household or married filing separately without living with spouse at any time during the year. At least $112,000 but less than $127,000

An individual who earns less than the ranges shown for his or her appropriate category can contribute up to 100% of his or her compensation or the contribution limit, whichever is less.

Those who fall within the ranges must use the following step-by-step formula to determine the amount they may contribute:

  • Step 1 - Subtract the lowest dollar amount in the range from MAGI
  • Step 2 - Divide the result in Step 1 by the difference between the lowest amount in the range and the highest amount in the range
  • Step 3 - Multiply the result from Step 2 by the maximum contribution limit
  • Step 4 - Subtract the result in Step 3 from the maximum contribution limit. The result is the amount the individual is allowed to contribute to a Roth IRA.

Let's illustrate how the formula works for three different individuals for 2013:

  • John, age 35, who is married, files a joint tax return and has a MAGI of $183,000
  • Mary, age 30, who is married, files a separate tax return, lived with her spouse during the year and has a MAGI of $5,000
  • Jane, age 52, who is single and has a MAGI of $119,000
Step John Mary Jane
Range $178,000 to $188,000 $0 to $10,000 $112,000 to $127,000
Step 1 183,000- 178,000 = 5,000 5,000 - 0 = 5,000 119,000 - 112,000 = 7,000
Step 2 5,000 / (188,000 - 178,000) 5,000 / (0 - 10,000) 7,000 / (127,000 - 112,000)
5,000 / 10,000 = 0.5 5,000 / 10,000 = 0.5 7,000 / $15,000 = 0.467
Step 3 0.5 x 5,500 = 2,750 0.5 x 5,500 = 2,750 0.467 x 5,500 = 2,568
Step 4 5,500 - 2,750 = 2,750 5,500- 2,750 = 2,750 5,500- 2,568 = 2,932
Round up to the nearest $10 = $2,940



A Roth IRA can also be funded by a conversion.

No Age Limitation
There are no age limitations for funding a Roth IRA.

Roth IRAs: Contributions

  1. Roth IRAs: Introduction
  2. Roth IRAs: Eligibility Requirements
  3. Roth IRAs: Contributions
  4. Roth IRAs: Distributions
  5. Roth IRAs: Conclusion
RELATED TERMS
  1. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  2. Provisional Patent Application

    A short-term means of protecting an invention that requires less ...
  3. Gold IRA

    Definition of Gold IRA
  4. Franchise disclosure document

    A Franchise Disclosure Document (FDD) is a legal document presented ...
  5. Michael Bloomberg

    Michael Bloomberg is one of the wealthiest persons in the world ...
  6. Mark Zuckerberg

    Self-taught computer programmer and self-made multi-billionaire ...
  1. What are the most common momentum oscillators used in options trading?

    Read about some of the most common technical momentum oscillators that options traders use, and learn why momentum is a critical ...
  2. How are Bollinger Bands® used in options trading?

    Use Bollinger Bands to identify volatility changes and place options trades at the right time; profit in bull or bear markets ...
  3. Can I purchase mutual funds for my IRA?

    Learn how to invest your IRA assets in mutual funds. Discover a few of the different types of mutual funds available for ...
  4. What are examples of cost of goods sold (COGS) for businesses that sell through eBay ...

    Read how online retailers that operate through eBay or Etsy can list certain expenses as cost of goods sold and even claim ...

You May Also Like

Related Tutorials
  1. By midlife, you're likely to have accumulated a string of IRAs, 401(k)s and the like.
    Retirement

    Consolidating Your Retirement Money

  2. Options & Futures

    Binary Options Tutorial

  3. The New York Stock Exchange
    Mutual Funds & ETFs

    Top ETFs And What They Track: A Tutorial

  4. The NYSE floor excitement after a rebound. Being a stock trader can be highly gratifying.
    Active Trading Fundamentals

    Introduction to Stock Trader Types

  5. Retirement

    Analyzing The Best Retirement Plans And Investment Options

Trading Center