Like many other personal finance and investing bloggers, I am a huge fan of Roth IRAs. They are, in my opinion, a tremendous way for the average family to build wealth for retirement. While it is certainly true that these individual retirement arrangements are relatively straight forward and easy to understand, it is easy to be confused about the various Roth IRA contribution limits.
With that being said, this article will summarize a few of the most recent changes and should help you better plan for the new tax year. As a reminder, only individuals are eligible to open and contribute to a Roth IRA. Additionally, individuals must also satisfy a specific set of compensation requirements and adjusted gross income limits.
Roth IRA Contribution Limits
Despite the fact that Roth IRAs are the retirement investment vehicle of choice recommended by many financial planners, not everyone is eligible to contribute, or even open one. Currently, Roth IRAs are restricted to those individuals that have an adjusted gross income of less than $122,000 ($179,000 for married couples filing jointly). Furthermore, the most than any one investor can contribute is $5,000 (or $6,000 for those investors over the age of 50).
If, however, an investor has a traditional IRA, as well as a Roth IRA, and contributions are made to both accounts, additional factors must be carefully considered. In this scenario, the Roth IRA contribution limit is typically the same as if contributions were made only to the Roth. It is simply reduced by all contributions made during the year to any other retirement account other than the Roth (a SIMPLE IRA plan or SEP, for example).
Roth IRA Contribution Deadline
Similar to a traditional IRA, contributions can be made at any time during the year. Furthermore, if contributions are made before the due date of the investors tax return, these contributions can also be applied. What this essentially means is that an investor, for the 2011 tax year, can make contributions at any time starting on January 1st and ending on April 17, 2012 (assuming this does not change in the meantime).
Excess Contributions
When it comes to investing in a Roth, more is not necessarily better. In fact, any contribution that is made in excess of the established Roth IRA contribution limits is assessed a 6% excise tax. Excess contributions include:
- any contribution that is more than that individuals (or familys) annual limit
- any excess contribution from the previous year (which is reduced by any current year distributions plus the individuals current year limit minus contributions made to all of the investors IRAs for the year.
If an investor realizes that they have made a contribution in excess of the established limit, as long as they withdraw it before their individual tax returns are due, that contributions is deemed as not being made. Any earnings, however, are typically deemed to be earned, and received, in the same tax year as the contribution was made.
Finally, an investor can also elect to apply excess contributions made in one year to a later year if the contribution limit for that later year is less than the established Roth IRA contribution limits.