Roth IRA Income Limits Establish The Amount Of Contributions

Understanding Roth IRA income limits is the first step to making the most of your retirement investment. You may be looking for a brand new investment vehicle for retirement funds.

Or you may be considering a Roth IRA conversion to transfer funds from a traditional IRA to a Roth IRA account. Either way, you need to know what the income limitations are so you can decide if this retirement vehicle is the best choice for your needs.

Roth IRA Eligibility

The first factor involved in Roth IRA income limits is where the income is derived. Those with large inheritances or trust funds are not allowed to use those monies to fund a Roth IRA.

The income limitations in the IRS Publication 590 clearly state that money put into a Roth IRA must be from taxable compensation. This means the funds must come from salary, wages, tips, bonuses or fees paid for services rendered. Form 8606 is used to track Roth IRA income limits to ensure they come from proper sources.

Income Limits For Roth IRA

You know that a Roth IRA contribution is limited to taxable compensation, but that is only half the story. Roth IRA income limitations also involve how much modified adjusted gross income you declare in a single year. If you make less than the income limitations, you can make a full Roth IRA contribution.

If you make an amount that falls in the window of max income, you will be able to make phase-out contributions. If your modified adjusted gross income exceeds a particular amount, you are not eligible for a Roth IRA contribution for that year.

Tax Return Filing Status

If you fall into this category, according to Roth IRA income limits for 2011, you can make the maximum Roth IRA contribution if your modified adjusted gross income is less than $120,000.

If you make at least $101,000 but less than $116,000, your Roth IRA contribution is still allowed, but at a smaller amount. If you make more than $120,000 in a given year, you have exceeded the income limits and cannot contribute for that year.

If you are married filing jointly, the Roth IRA income limits change. Those who made less than $176,000 in 2011 were eligible to make a full Roth IRA contribution. Those who made more than $159,000 and less than $166,000 could make a reduced contribution.

If you made more than $176,000 married filing jointly in 2011, you were unable to make a Roth IRA contribution for that year, according to income limitations.

Special Exceptions For 2011

In 2011, there is a special exception to the standard income limits on who can convert a traditional IRA to a Roth IRA regardless of income. This allows high-income earners to make a Roth IRA conversion when they would normally be prohibited by the income limits. This only applies to 2011 and the income taxes due can be spread out over two years.

To find out about the Roth IRA income limits for 2010, talk to a tax advisor. Finding out the limitations on income for future years will help you plan according for your retirement.