Although not as well-known as a traditional IRA, contributing to a Roth IRA is a solid retirement savings idea. Because the money going into your Roth IRA is contributed after taxes, distributions will be tax-free in retirement. If you follow the Roth IRA withdrawal rules, this tax-free status will apply to both your contribution amounts and any investment growth you may have experienced.
Not only can this be a hedge against potentially high tax rates during your retirement but, because the distributions aren’t counted by the IRS as income, it may enable you to keep your entire income in a lower tax bracket. This can save you money in Social Security taxes and Medicare premiums (which increase at higher income levels).
However, you first have to figure out if you are eligible to contribute to a Roth IRA, and the rules for Roth IRA income limits are a bit complex.
Note that the 2019 contribution limits apply to the total of your contributions to both traditional and Roth IRAs. Each type does not have a separate limit.
|IRS Filing Status||2019 Income* Limits||2019 Contribution Limits|
|Single, head of household or married filing separately (if you did not live with your spouse during the year)||Less than $122,000||$6,000|
|$122,000 to $136,999||Contribution is reduced|
|$137,000 or more||Ineligible|
|Married filing jointly or qualifying widow(er)||Less than $193,000||$6,000 per person|
|$193,000 to $202,999||Contribution is reduced|
|$203,000 or more||Ineligible|
|Married filing separately (if you lived with your spouse at any time during the year)||$0||$6,000|
|$1 to $9,999||Contribution is reduced|
|$10,000 or more||Ineligible|
*modified adjusted gross income (MAGI) per the IRS
The figures for “married filing separately” are not mistakes. If you live with your spouse at any time during the tax year and file separately, the IRS severely limits the amount you can contribute to a Roth IRA account. However, in this situation, the IRS does allow you higher tax-deductible contributions to a traditional IRA, so that is a possible alternative.
The contribution limits in the chart are the totals that you can contribute to any type of IRA in a year. You could contribute all of it to a Roth IRA, all of it to a Traditional IRA or split your contributions among them. The primary benefit of a Traditional IRA is that earnings in the account, if any, grow on a tax-deferred basis. In addition, with a Traditional IRA, there are no income restrictions if you don’t have a work-sponsored retirement plan. Read more about the differences here.
To contribute to a Roth IRA, you must make “earned income” during the tax year. Earned income is money paid for work you performed or profit distributions from a small business. It includes wages, salaries, tips, bonuses, commissions, and self-employment income. It also includes some less common items, like scholarships and fellowships, jury duty pay and accrued vacation payments.
Earned income does not include interest and dividends from investments, income from rental property, pension payments, Social Security payments or IRA distributions.
All of the Roth IRA income limits in the chart refer to modified adjusted gross income. To figure your modified adjusted gross income, use Appendix B, Worksheet 2 from IRS Publication 590-A to modify the adjusted gross income (AGI) from your tax return for Roth IRA purposes. Or ask your tax advisor for assistance.
There are additional rules that may affect whether or not you are eligible for a Roth IRA or how much you can contribute:
There are rules governing not just Roth IRAs but all types of savings and investment account types. What’s important is to know how these rules apply to your situation and what combination may be best for you right now.
At Goldman Sachs personal Financial Management our advisors believe it’s not just about money—it’s about your entire life. Money is just fuel for living the life you want, which means something different for each person.
Every individual has different intentions, goals, preferences, strengths, and priorities, as well as different trade-offs they are willing to make. Our advisors want to understand yours thoroughly before they design a financial plan for you.
Speak with a Golman Sachs Personal Financial Management advisor today to learn more.
To qualify for the tax free penalty free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½.
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