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Roth IRAs have income limits. Here’s how to tell if you make too much money to take advantage of this retirement account.
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A Roth IRA can be a great retirement account. You can open one at any brokerage firm that offers them. And while you will not get a tax deduction for investing in one in the year you contribute to it, you get to take tax-free withdrawals during your retirement. Unlike most other tax-advantaged retirement plans, you also don’t have to take required minimum distributions (RMDs) so you can make withdrawals when you want — instead of when the government says you must.
Unfortunately, not everyone can invest in a Roth IRA. If you’re thinking of putting your money into this kind of retirement plan, there’s one big thing that could stop you. Here’s what it is.
If you make too much money, a Roth IRA may not be an option for you
The big factor that could prevent you from making Roth IRA contributions is your income. Specifically, it’s your modified adjusted gross income (MAGI), which is calculated by:
Determining your adjusted gross income (AGI): That’s your total income minus adjustments such as alimony payments, half of self-employment taxes, retirement account contributions, health insurance premiums, HSA contributions, student loan interest deductions, and educator expenses. Adding back certain deductions you claim: You’ll need to add back certain deductions including deductions for taxable Social Security payments, loan interest, tuition and fees, partnership or passive income losses, rental losses, excluded adoption expenses, excluded foreign income, half of self-employment tax, and retirement account contributions.
Healthcare.gov actually has a really good simple explainer that shows you exactly what income counts when determining your MAGI that you can use to figure yours out. You can also use an online calculator since MAGI doesn’t actually appear on your tax return.
You can calculate your MAGI and then check the table below to see if you’re eligible to make a Roth IRA contribution based on your income and tax-filing status. The table is accurate for 2023, and during the 2023 year, the annual contribution limit for a Roth IRA is $6,500 or $7,500 if you are 50 or older and eligible for catch-up contributions.
What can you do if you make too much?
If you make too much money to contribute to a Roth IRA, that’s a huge disappointment if you were hoping to take advantage of this account. But you still have several good options for retirement savings including the following:
Contribute to a workplace 401(k): This will provide an upfront tax break instead of a tax break in retirement. But, you can earn an employer match if your company offers one and there’s no income limits to contribute. Contribute to a workplace Roth 401(k): A growing number of employers offer Roth 401(k)s so you can defer your tax benefits to retirement. Starting in 2024, Roth 401(k)s also won’t be subject to required minimum distribution rules. Contribute to a traditional IRA: If neither you nor your spouse have access to a retirement plan at work, there are no income limits for traditional IRA contributions. You will have to claim your deduction in the year you contribute, though, rather than deferring it until the future. Contribution to self-employed IRA plans: If you work for yourself, you may be able to contribute to a SEP-IRA or a Simple IRA, which are not subject to the same income limits as traditional or Roth IRAs. These will also provide you with a tax break now, not in retirement, but they at least provide a tax-advantaged plan when you may not have many other options.
You may also have the option to do a backdoor Roth contribution, which means contributing to a traditional IRA and then immediately converting it to a Roth IRA. This could have tax implications, although you can usually avoid this issue if you immediately convert the money as soon as you contribute it.
If you make too much to contribute to a Roth, the important thing is not to give up. Explore these other retirement plans or consider talking to a tax professional about whether a backdoor Roth IRA could work for you.
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