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Who Can Contribute to a Roth IRA?

In the world of retirement savings, Roth Individual Retirement Accounts (IRAs) stand as an increasingly popular choice. These specialized accounts enable individuals to make after-tax contributions to their retirement pot, allowing for tax-free withdrawals once they retire. Yet, despite their appeal, the question often arises: "Who can contribute to a Roth IRA?" The answer is, surprisingly, most people. However, one's eligibility is contingent upon specific income limits, determined by their modified adjusted gross income (MAGI) and marital status. Here's a more detailed look at who can fund a Roth IRA and the potential benefits they can enjoy.

Understanding Roth IRA Eligibility Criteria

To start, Roth IRAs aren't accessible to everyone. Those interested must earn an income that falls under specific thresholds set by the IRS. For example, as per the 2016 guidelines, if you're married and file your taxes jointly, your adjusted gross income (AGI) must be under $194,000 to open a Roth IRA. However, a gradual phase-out occurs if your household income exceeds $184,000, limiting your contributions to the IRA.

For individuals, the gross income cap is $132,000, with a phase-out that initiates at $117,000. These income limits are essential to remember, as exceeding them may result in penalties or prevent you from contributing to a Roth IRA altogether.

Including the Non-Working Spouse

A lesser-known advantage of Roth IRAs is the ability to fund an account for a non-working spouse, provided your earned income falls under the requisite income limits. This feature makes Roth IRAs an attractive retirement savings tool for households with single income sources, helping ensure both spouses have sufficient funds for their golden years.

The 'Back Door' to Roth IRAs

While these income limits may seem restrictive, there's a somewhat covert pathway for high earners to reap the benefits of Roth IRAs: the 'Back Door' Roth. This concept, which gained popularity following legislative changes, involves opening a conduit IRA funded with after-tax dollars. The key is not to claim any deductions on this account, then transfer its assets to a Roth account.

Under current rules, this workaround can be executed regardless of your income, presenting a valuable loophole for high-income earners. However, there are crucial points to remember before considering a 'Back Door' Roth.

First, it may not be a viable option if you already have funds invested in pre-tax IRAs. The IRS anticipates taxes on these pre-tax funds to be paid first if you're converting funds to a Roth. Second, another way to back-door a Roth is by converting an entire Traditional IRA to a Roth, which would involve paying taxes on the IRA account's balance.

While 'Back Door' Roths offer a unique solution for individuals surpassing their income limits, their future remains uncertain. As such, those interested should always seek professional financial advice to ensure they're making the best decision for their individual circumstances.

While Roth IRAs have income limits, they offer unique benefits, making them a vital component of many retirement strategies. Whether you're eligible directly or through the 'Back Door', taking advantage of Roth IRAs can significantly enhance your retirement prospects.

Most people will be able to contribute to a Roth, but once your income hits certain limits, you may need to find another way. Many people use Roth IRAs to make after-tax retirement contributions that will not be taxable upon withdrawal.

If you have earned income under certain income limits, you can fund a Roth for yourself and even for a non-working spouse. Roth IRAs cannot be opened by everyone: the income limits are based on your modified adjusted gross income (MAGI) and marital status.

For example, as of 2016, if you are married and filing jointly, your adjusted gross income must be under $194,000 in order to open a Roth IRA, but there is a phase-out which limits your contributions if your household income is over $184,000. An individual cannot have a gross income exceeding $132,000, and there is a phase-out which starts at $117,000.

You didn’t hear it from us, but for individuals who have incomes over the limits, they may have the option of funding a Roth via a “back door.”

‘Back Door Roths’ became popular in the last few years when accommodative legislation was approved. The new rules basically mean you can open up a conduit IRA, fund it with after-tax dollars, not take any deductions on it, and transfer those assets over to a Roth account.

This all can be done regardless of your income.

It may not be a good option if you already have funds invested in pretax IRAs, because the IRS will expect taxes to be paid on these funds first if you’re converting funds to a Roth.

Which brings up another way to back-door a Roth - actually converting an entire Traditional IRA to a Roth, and paying taxes on the balance of the IRA account. It is uncertain how long back-door Roths will be permitted.

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 Disclaimers and Limitations

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