Roth IRA Contribution Limits
Roth and Traditional IRAs
Both Roth and Traditional IRAs provide for tax deferral. Tax deferral means that you will not owe taxes on interest income, dividend payments, or capital gains as they occur within your retirement account. A Roth IRA, however, is actually the mirror image of a Traditional IRA. Roth IRA contributions are made with after-tax money, which allows for tax-free withdrawals at retirement. A Traditional IRA, however, is funded with tax-deductible contributions. Tax-deductible contributions translate into Traditional IRA withdrawals that are taxed as ordinary income.
Roth IRA Contribution Limits
For the 2011 tax year, you can generally contribute $5,000 into Traditional and Roth IRAs combined, if you are less than 50 years old. If you are at least 50 years of age, your Roth IRA contribution limit is increased to $6,000. You can make contributions for the present tax year until an April 15th postmark date of the next calendar year. To do so, you should be careful to make the tax year distinction on any check that you mail in to your Roth IRA plan administrator. For example, you may write a check to make a 2011 tax year Roth IRA contribution on April 12, 2012. On the memo section of the check, you would indicate that the money is to be allocated towards a 2011 Roth IRA contribution.
Roth IRA Income Limits
Your modified adjustable gross income (MAGI) does affect the amount of money that you can contribute into a Roth IRA. You can contribute up to the $5,000 ($6,000 if at least 50 years old) limit, if you report MAGI of less than $107,000 or $169,000, as a single or married filing jointly taxpayer. With both single and married filing jointly statuses, your Roth IRA contribution limits are gradually phased out when you make at least $107,000 and $169,000 in MAGI, respectively. As a single filer, you cannot put any money into a Roth, if your modified adjusted gross income is equal to or greater than $122,000. As married filing jointly taxpayer, you cannot contribute to a Roth, if you report MAGI of at least $179,000. The rules for married filing single status are even more stringent. You cannot make any Roth IRA contributions, if you are married filing single and report at least $10,000 in modified adjusted gross income for the tax year.
Roth IRA Strategy
Be advised that the Roth IRA also exposes you to a 10 percent penalty tax on the withdrawal of investment gains made before age 59 ½. For example, you may make $5,000 worth of Roth IRA contributions at age 30 to purchase mutual funds. By age 32, your mutual funds have appreciated in value and are then worth $6,000. You would then owe the 10 percent penalty tax on $1,000 in gains, if you were to immediately sell off mutual funds and close out the account.
For flexibility, you should combine Roth IRA savings alongside a regular taxable brokerage account. With the taxable brokerage account, you can make unlimited contributions and sell off investments to access cash at any time -- without penalty.
Roth IRA Contribution Limits, Sources:
IRS: 2011 Roth IRA Contribution and Deduction Limits
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1 Comments
Post a CommentNice, easy-to-grasp explanation of the diffs between Roth and Traditional IRAs.