Who qualifies for a Roth IRA?
Can you make contributions for your child or a non-working spouse? What if you’re retired?
These are great questions, and the answer essentially hinges on two things – your type of income and the amount of your income.
As long as you meet the IRS requirements regarding your income, you can make a Roth IRA contribution. Nothing else really matters.
Your age doesn’t matter, and in a sense, the amount of income you earn doesn’t matter either. But we’ll address that later in this article. First, let’s take a look at the essential criteria for determining your ability to contribute to a Roth IRA.
In the eyes of the U.S. government, not all income is created equal, and you need a certain type of income in order to make a Roth IRA contribution.
A good rule of thumb for determining Roth IRA eligibility is whether or not you traded your time for an incremental amount of money. Eligible income is earned through active income generating activities and not passive ones. For example, if you work a 9 to 5 job, then the wages you earn from that job qualify. But if you derive all of your income from investing in real estate, then you probably don’t qualify for a Roth IRA contribution.
According to the IRS, types of eligible income include wages/salaries, sales commissions, tips, job-related profit sharing, and bonuses.
Passive forms of income are NOT eligible for Roth IRA contributions. How do you know if your income is passive? Remember, a good rule of thumb is whether or not you traded your time to earn the money. For instance, let’s say you spend the year vacationing abroad and you don’t work at all. By definition, any income you earn during the course of the year is passive income.
According to the IRS, types of non-eligible passive income include capital gains, dividends, interest, rental income, mineral extraction royalties, disability payments, welfare payments, social security payments, annuity income, and pension income.
If you have active income, you’re eligible to make a Roth IRA contribution – as long as your income falls within the pre-established IRS income limits.
Roth IRA Income Limits
Assuming you have the right type of income to make a Roth IRA contribution, you’re still subject to IRS income limits which cap your eligibility.
These income limits change from year to year, but for the current year, you’re prohibited from making a Roth IRA contribution if you earn more than:
- $183,000 if you’re married filing jointly
- $125,000 if you’re single, head of household, or married filing separately and did not live with your spouse for any part of the year
- $10,000 if you’re married filing separately and you did live with your spouse for any part of the year
Keep in mind that these are just the upper limits. As you approach these limits, your maximum contribution limit phases out.
But assuming you have the right type of income and your annual income falls below the IRS income limits, you’re eligible to make a Roth IRA contribution regardless of other factors.
Is There a Roth IRA Age Limit?
Currently, the IRS does not restrict Roth IRA eligibility based on age.
Nevertheless, because of the need to have earned income, some age groups are less likely to be eligible.
For instance, most 5 year-olds are not eligible to make a Roth IRA contribution. They can’t claim their allowance or cash gifts from grandma as income.
However, some 5 year-olds are eligible. For instance, professional child actors generate earned income which can be contributed to a Roth IRA.
Likewise, no upper age limit exists either. While most 90 year olds are not eligible because they’re usually living off of social security benefits and investment income, some 90 year olds are eligible. For instance, a 90 year-old working part-time at McDonald’s is eligible to make a Roth IRA contribution.
In short, there is no Roth IRA age limit. Eligibility is determined solely on the basis of the amount and type of annual income you generate.
And even the amount you earn is not completely restrictive.
The 2010 Roth IRA Conversion Rule Change
Prior to 2010, if you wanted to convert an old 401k or Traditional IRA to a Roth IRA, your ability to do so was subject to a $100,000 annual income limit.
But in 2010, Congress did away with the income limit entirely.
As a result, anyone (regardless of their level of income) can perform a Roth IRA conversion.
This is a significant change, because it essentially eliminates the income limits on making a Roth IRA conversion.
Why? Because no income limits exist in regard to making non-deductible contributions to a Traditional IRA.
For example, let’s say you earn $300,000 per year. Under the IRS income limits, you’re prohibited from making a direct contribution to your Roth IRA.
However, you’re NOT prohibited from making non-deductible contributions to a Traditional IRA. So you contribute $5,000 in after-tax dollars to a Traditional IRA.
Since the income limit on Roth IRA conversions no longer exists, you can then turn around and convert your Traditional IRA to a Roth IRA. The conversion will be tax-free since the money you’re converting is composed of non-deductible contributions.
In the end, the result is the same as if you had made a direct contribution to your Roth IRA!
However, Keep In Mind…
It’s always a good idea to consult with a professional financial advisor. Keep in mind that if you’re planning to perform a Roth IRA conversion and you’ve previously made both deductible and non-deductible contributions, the IRS won’t let you segregate the two and only convert the non-deductible contributions to your Roth IRA. So make sure you know what you’re doing.
Also keep in mind that your ability to make a Roth IRA contribution is also limited by any amounts you contribute to a Traditional IRA in the same year.
For instance, if you’re eligible to make a maximum annual contribution of $5,000 to your Roth IRA, this is the amount you can contribute in total to both your Roth IRA and your Traditional IRA. So if you decide to contribute $2,000 to your Traditional IRA, you’ll only be able to contribute $3,000 to your Roth IRA. And if you decide to contribute $5,000 to your Traditional IRA, then you can’t contribute anything to your Roth IRA.
This is an article from Britt at http://www.your-roth-ira.com, the Web’s #1 resource for Roth IRA information.
Last Edited: 23rd February 2012