Who Can Contribute to a Roth IRA?
In order to be eligible to make contributions to a Roth IRA you must have earned income and a modified adjusted gross income (MAGI) that is below the maximum income limitations set each tax year by the IRS.
Roth IRAs are an excellent tool for retirement saving; providing a unique opportunity to maximize tax efficiency in your nest egg.
If you already know your Roth basics, you may want to skip down to the next section. In case you’re a little fuzzy on the details, here’s a quick refresher.
Individual Retirement Accounts, better known as IRAs, can take on three different types of tax treatment.
Tax-deferred or Traditional IRAs allow account holders to make contributions on a pre-tax basis, meaning no income tax is withheld from contributions. In this case, income tax is collected as withdrawals are made in retirement.
Roth IRAs do not allow account owners to take a deduction for contributions, but the balance grows completely tax free for the remainder of the owner’s life (and up to 10 years after for their heirs).
After-tax contributions can also be made to IRAs, but they do not come with any tax deductions and the earnings are taxed as income upon withdrawal.
(Many people deposit funds on an after-tax basis because they intend to use the Backdoor Roth IRA method which we’ll discuss in more detail below.)
Having a variety of IRA options provides some control over how one is taxed for withdrawals in retirement; potentially leading to huge tax savings.
Of the three, Roth accounts provide the highest degree of leverage over one’s tax situation in retirement. It makes perfect sense to use Roth IRAs as much as logically possible.
(For more on comparing Roth and Traditional IRAs and 401(k)s, see our megapost on the topic.)
With the obvious stated, as wonderful as Roth IRAs are, not everyone is allowed to contribute.
In this post, we’ll talk about Roth IRA contribution restrictions and some workarounds that provide an opportunity that would otherwise be unavailable.
You Must Earn Income, But Not Too Much
The most basic and fundamental requirement for being eligible to contribute to a Roth IRA is that you have earned income.
That means income from work like owning a business or working at a normal job.
Passive sources of income like rental income (there are exceptions) or investment income do not qualify as earned income.
Have earned income? Great. I hope you don’t have too much.
The IRS places restrictions on contributions to Roth IRAs based on your modified adjusted gross income (MAGI).
Here’s a table of contribution limits for 2023 based on MAGI:
Filing Status | MAGI | Contribution Limit |
Married Filing Jointly | < $218,000 | $6,500 if under 50; $7,500 if 50 or older |
Between $218k and $228k | A reduced amount | |
> $228,000 | Nothing | |
Single or Head of Household | < $138,000 | $6,500 if under 50; $7,500 if 50 or older |
Between $138k and $153k | A reduced amount | |
> $153,000 | Nothing |
If your income exceeds the limits in the table above, don’t fret. We’ll cover some options below that allow nearly anyone with earned income to contribute to a Roth.
One other important item of note is that you cannot contribute an amount above your total modified adjusted gross income in a year.
So, if you happen to have enough money on hand to contribute up to the full annual limit, but only reported $3,500 in MAGI, you can only contribute up to $3,500 to a Roth IRA.
This is most relevant for young workers whose parents want to jumpstart their kid’s saving by taking advantage of the years available for compounding interest to work its magic.
I think providing a contribution on behalf of your kids is a great idea, but you’ll only be able to do so up to the amount of their earned income for the year.
Spousal IRA
Now that we’ve set a baseline for contribution eligibility and limitations, let’s talk about a few exceptions and alternative paths.
The first one I’d like to point out is the Spousal Roth IRA.
At face value, you might assume that a non-working spouse would not be eligible to contribute to a Roth IRA.
Thankfully, the IRS allows non-working spouses to contribute to a Roth IRA based on their working spouse’s income.
Spousal IRAs are subject to all the other income restrictions and contribution requirements that a working individual or couple would be, but the non-working spouse’s ability to contribute is based on their working spouse’s income instead of their own.
Therefore, the working spouse must have enough earned income to cover their contributions and those of their non-working spouse.
In order to make spousal IRA contributions, the couple must file a joint tax return.
Also, if the working spouse is covered by an employer-sponsored retirement plan the phase-out range for contributions is lower than normal so be sure to look into that.
Custodial Roth
Earlier, we kicked around the idea of parents contributing to a Roth IRA on behalf of their kids.
Roth IRAs are a particularly attractive place for kids to save money because they have such a long time for the earnings to pile up completely tax free.
Minor children will also typically have a low income, meaning their marginal tax rate is about as low as it will ever be. Paying taxes on the contributions while these children are in lower brackets makes good mathematical sense over the long haul.
Custodial Roth’s work just like regular Roth IRAs, with the same contribution and income limitations, but with a couple of nuances.
To begin, minor children need a parent or guardian to act as their custodian on the Roth IRA. Brokerages won’t allow kids to open an account.
The IRA does belong to the child, however. It is opened in their name and remains that way as long as they live.
There are no age limitations for making contributions. Even an infant can have a custodial Roth if they find a way to earn income.
Remember too, when we say earned income, we mean earned and reported to the IRS. So, if your child has a lucrative babysitting gig, but doesn’t turn in a W-2 to report income then he or she will not be eligible to contribute to a Roth IRA.
It must be reported income.
Custodial Roth accounts take just a few minutes to set up and operate just like any other Roth.
Alternatives:
The Backdoor Roth IRA
If your income is too high to contribute to a Roth IRA, but you still want to participate, you can always use a Backdoor Roth IRA.
A Backdoor Roth IRA is a creative way of working around the IRS’ income limitations for Roth IRA contributions.
Put simply, even though Roth and Traditional IRAs have income limitations, anyone can make after-tax contributions to an IRA.
Furthermore, anyone can convert their after-tax contributions to a Roth IRA, regardless of their income.
So, this method forces you to take one extra step to get there, but it’s a way to fund a Roth IRA when you otherwise wouldn’t be allowed to.
Bear in mind, you’ll owe income tax on any earnings the after-tax contributions realize on their way to being converted to Roth. Avoid this by just leaving your after-tax contribution in cash.
As a word of caution, be sure to review the pro rata rule for IRA conversions before you try the backdoor route.
We have much more information about the pro-rata rule and the backdoor Roth in the link above.
Roth 401(k)
In the early 2000s, legislation surrounding 401(k)s was amended to allow for Roth.
Today, over 85% of 401(k)s offer a Roth option.
Furthermore, the contribution limits for 401(k)s are almost 3.5 times higher than IRAs and safe harbor 401(k) plans have no income restrictions that limit your ability to contribute.
All of that is to say, if you have access to a Roth 401(k), then maybe it’s not a big deal that you can’t contribute to a Roth IRA.
Granted, 401(k) plans do not normally offer investments as attractive as those available through a direct IRA account, but it’s still a great place to put Roth savings if you have the mind to do so.
Currently, employer contributions to 401(k) plans are all made on a pre-tax basis, but beginning in 2024 employees can opt to have these contributions made in Roth form.
Income taxes for employer contributions would be the responsibility of the employee in this case.
