A Roth IRA can be an excellent way to stash away money for your retirement years. Like its traditional IRA cousin, this type of savings account allows your investments to grow tax-free, but it also lets you take tax-free withdrawals of your contributions at any time and tax-free withdrawals of earnings on contributions after a five-year holding period (assuming you are at least 59½, disabled, or using them for first-time home-buying expenses).

Of course, like other tax-advantaged retirement plans, the IRS has specific rules regarding Roth IRAs, including contribution limits, income limits, and how you can withdraw your money.

Eligibility for a Roth IRA

The primary requirement for contributing to a Roth IRA is having earned income. Eligible income comes in two ways: Work for someone else who pays you (including commissions, tips, bonuses, and taxable fringe benefits), or run your own business or farm. Some other types of income are treated as earned income for purposes of Roth IRA contributions: nontaxable combat pay, military differential pay, taxable alimony, and disability benefits.

Key Takeaways

  • Only earned income can be contributed to a Roth IRA.
  • You can contribute to a Roth IRA only if your income is less than a certain amount (under $137,000 for singles, $203,000 for married couples in 2019)
  • The maximum contribution for 2019 is $6,000; if you’re age 50 or over, it’s $7,000.
  • You can withdraw contributions tax-free at any time, for any reason, from a Roth IRA.
  • You can withdraw earnings from a Roth IRA, but it may trigger taxes and penalties depending on your age and that of the account.

Any sort of investment income from securities, rental property, or other assets counts as unearned income, and so it can't be contributed to a Roth. 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 (in contrast to a traditional IRA, which bars contributions after age 70½).

Also—and again, unlike the traditional IRA—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, 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 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 (here’s an explanation from the IRS).

In general, you can contribute the full amount (for 2019, that’s $6,000, or $7,000 if you’re age 50 and up) if your MAGI is below a certain amount. 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. Here are the Roth IRA income and contribution limits for 2019 (they are often adjusted annually to account for inflation):

2019 Roth IRA Income and Contribution Limits
Filing Status MAGI Contribution Limit
Married filing jointly    
  Less than $193,000 $6,000 ($7,000 if age 50+)
  $193,000 to $202,999 Begin to phase out
  $203,000 or more Ineligible for direct Roth IRA
Married filing separately*    
  Less than $10,000 Begin to phase out
   $10,000 or more Ineligible for direct Roth IRA
  Less than $122,000 $6,000 ($7,000 if age 50+)
  $122,000 to $136,999 Begin to phase out
  $137,000 or more Ineligible for direct Roth IRA

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

If you make too much money, you may be able to get around income limits by converting a traditional IRA into a Roth IRA, called a backdoor Roth IRA.

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

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 modified adjusted gross income (MAGI) of $175,000. Both earn $87,500 a year, and both have Roth IRAs. In 2019, they can each contribute the maximum $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, in order 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 his or her own IRA, whether they work or not.

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

How can this happen? To illustrate, let's go back back to our mythical couple. Say that Henrietta is the main breadwinner, pulling in $170,000 a year; 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 max. Each has their own IRA—but one spouse funds them both.

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. So, if an individual deposits, say, $2,500 in one IRA in 2019, that leaves that individual $3,500 to contribute to the other one.

Contributions to a Roth IRA can be made up until tax filing day of the following year. So, contributions to a Roth IRA for 2019 can be made through the April 15, 2020 deadline 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 will have to instruct your Roth IRA trustee or custodian that you want the refund applied in this way.

Conversions to a Roth IRA from a taxable retirement account, such as a 401(k) plan or a traditional IRA, have no impact on the contribution limit. However, making a conversion adds to MAGI, and may trigger or increase a phaseout 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. (This is why you don't pay taxes on the money when you withdraw it—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, adjusted gross income (AGI) and Roth IRA contribution.

Here are the limits to qualify:

  • Taxpayers who are married and filing jointly must have incomes below $64,000 (for 2019).
  • Head-of-household filers must have incomes below $48,00.
  • Single taxpayers must have incomes below $32,000.

The amount of credit you get depends on your income. For example, if you are a head of household whose AGI in 2019 shows income of no more than $28,875, contributing $2,000 or more to a Roth IRA generates a $1,000 tax credit—the maximum 50% credit. The IRS has a chart that will give you the details.

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 (the “5-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 5-year rule.

If you meet the 5-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 if you have a permanent disability or you pass away (and your beneficiary takes the distribution).
  • 59½ or over: No taxes or penalties.

If you don’t meet the 5-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 a first-time home purchase, qualified education expenses, unreimbursed medical expenses, or if you have a permanent disability or you pass away (and your beneficiary takes the distribution).
  • 59½ or over: Earnings are subject to taxes, but not penalties.

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 whatever it originally was.

Record-keeping 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.


5 Secrets You Didn’t Know About Roth IRAs

The Bottom Line

While not tax-deductible, contributions to a Roth IRA give you the opportunity to create a tax-free savings account that you can use in retirement or leave as an inheritance for your heirs. Offering many of the advantages of regular IRAs, but with more flexibility, it works 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.