Roth IRAs: Eligibility Requirements

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

Any individual who has eligible compensation (e.g. wages, salary, and self-employment income which is earned by sole proprietors and partners) may make a regular contribution to Roth IRA for that year, providing as long as the individual’s modified adjusted gross income (MAGI) is less than a certain amount. This amount is based on the individual’s tax-filing status. See the MAGI limits for 2018 later.

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 savings & 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 in 2018:

Category Income Range for 2018
Married and filing a joint tax return, qualifying widow(er). At least $189,000 but less than $199,000
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 $120,000 but less than $135,000

 

[The relevant figures for tax year 2017 are: married/joint return: $186,0000 - $196,000; married/separate return/lived with spouse: same as 2018; single/head of household/married + not lived with spouse: $118,000 - $133,000.]

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 the 2018 tax year:

  • John, age 35, who is married, files a joint tax return and has a MAGI of $194,000
  • 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 $124,000
Step John Mary Jane
Range $189,000 to $199,000 $0 to $10,000 $120,000 to $135,000
Step 1 194,000 – 189,000 = 5,000 5,000 – 0 = 5,000 127,000 – 120,000 = 7,000
Step 2

 

5,000 ÷ (199,000 – 189,000)  5,000 ÷ (10,000 – 0) 7,000 ÷  (135,000 – 120,000)
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 Roth conversions, rollovers from other Roth IRAs, and rollovers from employer sponsored retirement plans.

Age Limitations

There are no age limitations for funding a Roth IRA.

Roth IRAs: Contributions