Roth IRA Contribution Rules: A Comprehensive Guide

Everything You Need to Know About Contributions and Distributions

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Roth IRAs: The Complete Guide
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A Roth IRA can be an excellent way to stash away money for your retirement years. Unlike its cousin, the traditional IRA, this type of retirement account allows your investments to grow tax-free. It also lets you take tax-free withdrawals of your contributions (but not earnings) at any time.

Under certain conditions, Roth IRAs also allow tax-free withdrawals of earnings, which are taxable in a traditional IRA, on contributions after a five-year holding period. Those conditions include reaching age 59½, being disabled, or using the funds as first-time homebuyers.

Of course, as they do with other tax-advantaged retirement plans, the IRS has specific rules regarding Roth IRAs. These rules cover contribution limits, income limits, and how you can withdraw your money.

Key Takeaways

  • Only earned income can be contributed to a Roth IRA.
  • Most people can contribute up to $6,000 to a Roth IRA in 2021. If you are more than fifty years old, the limit is $7,000.
  • There are also contribution limits based on your household income and filing status. If your earned income is too high, you cannot contribute at all.
  • You can withdraw contributions tax-free at any time from a Roth IRA.
  • Although earnings from a Roth IRA can be withdrawn, that may trigger taxes and penalties depending on your age and that of the account.

Roth IRA Eligibility

The primary requirement for contributing to a Roth IRA is having earned income. Eligible income comes in two ways. First, you can work for someone else who pays you. That includes commissions, tips, bonuses, and taxable fringe benefits.

The second way to earn an eligible income is to run your own business or farm. There are also some other types of income that are treated as earned income for purposes of Roth IRA contributions. They include untaxed combat pay, military differential pay, and taxed alimony.

Any type of investment income from securities, rental property, or other assets counts as unearned income. So it can't be contributed to a Roth IRA. Other common types of income that don't count include:

  • Alimony (nontaxable)
  • Child support
  • Social Security retirement benefits
  • Unemployment benefits
  • Wages earned by penal institution inmates

There is no age threshold or limit for making Roth IRA contributions. For example, a teenager with a summer job can establish and fund a Roth. (It might have to be a custodial account if they're underage.) On the opposite end of the spectrum, an employed person in their 70s can continue to contribute to a Roth IRA.

People of all ages can also contribute to traditional IRAs. In the past, participants in a traditional IRA could not make contributions after age 70½. But with the December 2019 passage of the SECURE Act, there is no longer an age cutoff on traditional IRA contributions.

Also, the fact that you participate in a qualified retirement plan has no bearing on your eligibility to make Roth IRA contributions. So if you have the money and meet the income limitations, you can contribute to a 401(k) plan at work and then contribute to your own Roth IRA.

Roth IRA Income Limits

Eligibility to contribute to a Roth IRA also depends on your overall income. The IRS sets income limits that restrict high earners. The limits are based on your modified adjusted gross income (MAGI) and tax-filing status. MAGI is calculated by taking the adjusted gross income (AGI) from your tax return and adding back deductions for things like student loan interest, self-employment taxes, and higher education expenses.

In 2021, you can contribute the full amount if you are single and your MAGI is less than $125,000 (or $198,000, if you are married and filing jointly). If you make more than that, the maximum contribution decreases as your MAGI goes up. If your MAGI is higher than $140,000 (or $208,000, for married couples filing together) you cannot contribute at all.

These limits increase every year. In 2022, you will be able to make full Roth IRA contributions as long as you make less than $129,000, and partial contributions up to the maximum MAGI of $144,000. For married couples filing together, the limits will be $204,000 and $214,000, respectively.

Most people qualify for the maximum contribution of $6,000, or $7,000 for those age 50 and up. If your MAGI is in the Roth IRA phase-out range, you can make a partial contribution. You can’t contribute at all if your MAGI exceeds the limits. The IRS updates the Roth IRA income limits every year to account for inflation and other changes.

Roth IRA Income and Contribution Limits
Filing Status 2021 MAGI 2022 MAGI Contribution Limit
Married filing jointly (or qualifying widow(er))    
  Less than $198,000 Less than $204,000 $6,000 ($7,000 if age 50+)
  $198,000 to $207,999 $204,000 to $213,999 Begin to phase out
  $208,000 or more $214,000 or more Ineligible for direct Roth IRA
Married filing separately (and you lived with your spouse at any time during the year)    
  Less than $10,000 Less than $10,000 Begin to phase out
  $10,000 or more $10,000 or more Ineligible for direct Roth IRA
Single, head of household, or married filing separately (and you didn't live with your spouse at any time during the last year)    
  Less than $125,000 Less than $129,000 $6,000 ($7,000 if age 50+)
  $125,000 to $139,999 $129,000 to $143,999 Begin to phase out
  $140,000 or more $144,000 or more Ineligible for direct Roth IRA

Married filing separately and head-of-household filers can use the limits for single people if they have not lived with their spouse in the past year.

IRS Publication 590-A provides a worksheet to figure out MAGI and the allowable contribution amounts.

You may be able to get around income limits by converting a traditional IRA into a Roth IRA, which is called a backdoor Roth IRA.

Roth IRA Contribution Limits

Anyone of any age can contribute to a Roth IRA, but the annual contribution cannot exceed their earned income. Let's say that Henry and Henrietta, a married couple filing jointly, have a combined MAGI of $175,000. Both earn $87,500 a year, and both have Roth IRAs. In 2021, they can each contribute the maximum amount of $6,000 to their accounts, for a total of $12,000.

Couples with highly disparate incomes might be tempted to add the higher-earning spouse's name to a Roth account to increase the amount they can contribute. Unfortunately, IRS rules prevent you from maintaining joint Roth IRAs—that's why the word "individual" is in the account name. However, you may accomplish your goal of contributing larger sums if your spouse establishes their own IRA, whether they work or not.

How can this happen? To illustrate, let's go back to our hypothetical couple. Let's say that Henrietta is the primary breadwinner, pulling in $170,000 a year while Henry runs the house, earning $5,000 annually. Henrietta can contribute to both her own IRA and to Henry's, up to the $12,000 maximum. In this case, they each have their own IRAs, but one spouse funds both of them.

A couple must file a joint tax return for the spousal IRA to work, and the contributing partner must have enough earned income to cover both contributions.

Timing Your Roth IRA Contributions

Although you can own separate traditional IRAs and Roth IRAs, the dollar limit on annual contributions applies collectively to all of them. If an individual under 50 deposits $2,500 in one IRA for the tax year 2021, then that individual can only contribute $3,500 to another IRA in that tax year.

Contributions to a Roth IRA can be made up until tax filing day of the following year. So contributions to a Roth IRA for 2021 can be made through the deadline on April 15, 2022, for filing income tax returns. Obtaining an extension of time to file a tax return does not give you more time to make an annual contribution.

If you're a real early-bird filer, and you received a tax refund, you can apply some or all of it to your contribution. You must instruct your Roth IRA trustee or custodian that you want the refund used in this way.

Conversion to a Roth IRA from a taxable retirement account, such as a 401(k) plan or a traditional IRA, has no impact on the contribution limit. However, making a conversion adds to MAGI, and may trigger or increase a phase-out of your Roth IRA contribution amount. Also, rollovers from one Roth IRA to another are not taken into account for purposes of making annual contributions.

Tax Breaks for Roth IRA Contributions

The incentive for contributing to a Roth IRA is to build savings for the future—not to obtain a current tax deduction. Contributions to Roth IRAs are not deductible the year you make them—they consist of after-tax money. That is why you don't pay taxes on the funds when you withdraw them—your tax bill has already been paid.

However, you may be eligible for a tax credit of 10% to 50% on the amount contributed to a Roth IRA. Low- and moderate-income taxpayers may qualify for this tax break, called the Saver's Credit. This retirement savings credit is up to $1,000, depending on your filing status, AGI, and Roth IRA contribution.

Here are the limits to qualify for the Saver's Credit for the 2021 (and 2022) tax year:

  • Taxpayers who are married and filing jointly must have incomes below $66,000 ($68,000).
  • All head-of-household filers must have incomes below $49,500 ($51,000).
  • Single taxpayers must have incomes below $33,000 ($34,000).

The amount of credit you get depends on your income. For example, if you are a head-of-household whose AGI in the 2021 tax year shows income of $29,625, contributing $2,000 or more to a Roth IRA generates a $1,000 tax credit, which is the maximum 50% credit. The IRS provides a detailed chart of the Saver's Credit.

The tax credit percentage is calculated using IRS Form 8880.

Roth IRA Withdrawal Rules

Unlike traditional IRAs, there are no required minimum distributions (RMDs) for Roth IRAs. You can take out your Roth IRA contributions at any time, for any reason, without owing any taxes or penalties.

Withdrawals on earnings work differently. In general, you can withdraw earnings without penalties or taxes as long as you’re 59½ or older and you’ve owned the account for at least five years. This restriction is known as the five-year rule.

Your withdrawals may be subject to taxes and a 10% penalty, depending on your age and whether you meet the requirements of the five-year rule.

If you meet the five-year rule:

  • Under 59½: Earnings are subject to taxes and penalties. You may be able to avoid taxes and penalties if you use the money for a first-time home purchase or have a permanent disability. If you pass away, your beneficiary may also be able to avoid taxes on the distribution.
  • 59½ or over: No taxes or penalties.

If you don’t meet the five-year rule:

  • Under 59½: Earnings are subject to taxes and penalties. You may be able to avoid the penalty (but not the taxes) if you use the money for specific purposes. They include first-time home purchases, qualified education expenses, unreimbursed medical expenses, and permanent disabilities. If you pass away, your beneficiary may be able to avoid penalties on the distribution.
  • 59½ or over: Earnings are subject to taxes but not penalties.

Special Changes in 2020

In 2020, the coronavirus stimulus bill (called the CARES Act) allows those affected by the coronavirus pandemic a hardship distribution of up to $100,000 without the 10% early distribution penalty those younger than 59½ normally owe.

Account owners also have three years to pay the tax owed on withdrawals, instead of owing it in the current year, or they can repay the withdrawal and avoid owing any tax—even if the amount exceeds the annual contribution limit for that type of retirement account.

Unlike Roth IRAs, Roth 401(k)s are subject to RMDs during the owner's lifetime. But the CARES Act suspended this requirement in 2020.

Changes in Roth IRA Rules

The Tax Cuts and Jobs Act of 2017 made some changes to the rules governing Roth IRAs. Previously, if you converted another tax-advantaged account (SEP IRA, SIMPLE IRA, traditional IRA, 401(k) plan, or 403(b) plan) to a Roth IRA and then changed your mind, you could undo it in the form of a recharacterization.

No longer. If the conversion occurred after Oct. 15, 2018, it cannot be recharacterized back into a traditional IRA or back into its original form.

Recordkeeping for Roth IRA Contributions

You do not have to report your Roth IRA contribution on your federal income tax return. However, it is highly advisable for you to keep track of it, along with your other tax records for each year. Doing so will help you demonstrate that you’ve met the five-year holding period for taking tax-free distributions of earnings from the account.

Each year that you make a Roth IRA contribution, the custodian or trustee will send you Form 5498, IRA Contributions. Box 10 of this form lists your Roth IRA contribution.

The Bottom Line

While not tax-deductible, contributions to a Roth IRA give you the opportunity to create a tax-free savings account. You can use this account in retirement or leave it as an inheritance for your heirs. Roth IRAs offer many of the advantages of regular IRAs, but with more flexibility. They work well for people who are more likely to need tax relief later rather than sooner. Opening one is easy, and there are many excellent Roth IRA providers that handle these accounts.

Correction—Nov. 18, 2021. This article has been corrected from a previous version that misstated the Roth IRA contribution limits.

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