I‘ve been talking quite a bit since I launched this site about Roth IRAs, and why they're such a great idea. After all, who doesn't like tax free money at retirement? (Can you tell that I like them?)
One thing I haven't examined very closely, however, is the fact that Roth IRAs are not available to everyone. It's like when you were a youngster and you saw that they were giving out full sized candy bars at one house at Halloween. Everyone got one until they got to you – and the candy ran out! Sorry!
Roth IRAs are like those full sized candy bars – they aren't available to everyone, and you may be left out in the cold if you don't meet the requirements.
Roth IRAs are available to anyone regardless of age, however, there is a catch. The child needs to have claimed “earned income”. That means that your child will actually need to have received a W-2 or 1099 showing the income made. So that babysitting job they had last week, or the job cutting the neighbor's lawn probably won't cut it. So, no age restrictions, but there is a need for “earned income”.
Modified Adjusted Gross Income Affects Roth Eligibility
Your MAGI or Modified Adjusted Gross Income will be one of the most important factors determining whether you are eligible to contribute to a Roth IRA. Your MAGI calculation will be used to determine if you exceed the Roth IRA phaseout limits to be able to contribute funds.
If you fall somewhere in the middle of the phaseout range, it can mean some fancy math trying to find out how much you can exactly contribute to a Roth. First, here's the phaseout limits:
|IRA Type||Single||Married Filing Jointly|
|Roth IRA||$105,000 – $120,000||$167,000 – $177,000|
|Traditional IRA||$55,000 – $65,000||$89,000 – $109,000|
Example: Let's say you make $110,000 and you're single. How much could you contribute to a Roth IRA since you're smack dab in the middle of the phaseout range? Here' s how you figure it out.
- Find out the phase you fall into. In this case you fall into the $105,000-$120,000 range.
- Subtract your MAGI from the upper range of the phaseout range. In this case that would mean $120,000-$110,000 = $10,000.
- Divide the number in step two by the amount of the spread in the range ($10,000/$15,000 = .6667 or 66.67%)
- You are able to contribute 66.67% of the $5,000 limit. Since you can contribute 66.67% of the limit that comes to a total contribution for the year of $3333.33.
Under The Phaseout Roth IRA Contribution Limit
For the 2010 tax year Roth IRA cntribution limits stay steady at $5,000. For those over the age of 50, you can make a catch up contribution of $1,000. That means for 2010 you have a total contribution limit of $6,000. If you’re married, that’s $6,000 for you and $6,000 for your spouse.
Start A Roth IRA Today – Time Is Your Friend!
If you're eligible for a Roth IRA and you've decided to open one, do it now! The longer you invest your money for, the greater the effects of compounding interest! So get moving!