A Roth IRA is one of three key tax advantageous retirement plans for employees, the other being the 401(k) and the traditional IRA. Because Roth IRA contributions are made with post-tax dollars, employees are able to withdraw from the Roth IRA penalty free before the age of 59.5 if they’ve opened their Roth IRA account for more than 5 years. This flexibility is important if you decide to retire early.
Unfortunately, not everyone can open and contribute to a Roth IRA if they make over a certain amount. Let’s take a look at the 2019 Roth IRA Income Limits For Single Filers and Married Filers.
2019 Roth IRA Income Limits for Single Filers
If you file as single, head of household or married filing separately (if you did not live with your spouse at any time during the year) your MAGI must be less than $122,000 to contribute up to the limit.
If your MAGI falls between $122,000 and $136,999 you cannot contribute the full amount. Your contribution is reduced. Use the IRS worksheet to calculate your new reduced Roth IRA contribution limit.
If your MAGI is $137,000 or more you cannot contribute to a Roth IRA.
2019 Roth IRA Income Limits for Married Filers (Joint)
If you file as married filing jointly or as a qualifying widow(er) your MAGI must be less than $193,000 to contribute up to the limit.
If your MAGI falls between $193,000 and $202,999 you cannot contribute up to the limit. Your contribution is reduced. Use the IRS worksheet to calculate your new reduced Roth IRA contribution limit.
If your MAGI is $203,000 or more, you cannot contribute to a Roth IRA.
2019 Roth IRA Income Limits for Married Filers (Separate)
The IRS severely limits the ability to contribute to a Roth IRA for individuals who are married but file separately and have lived with their spouses at any time during the year. If you do not have earned income you will not be allowed to contribute to a Roth IRA.
If your MAGI is $10,000 or more, you cannot contribute to a Roth IRA. Starting at an income of $1,000, the amount you can contribute begins to drop. Use the IRS worksheet to calculate your reduced Roth IRA contribution limit.
Maximum Contribution Amount To Roth IRA 2019
The maximum you can contribute to a Roth IRA for 2019 is $6,000. Individuals age 50 and over can contribute up to $1,000 extra per year to “catch up” for a total of $7,000.
Although this is not a huge number to save fore retirement, every dollar counts. If your employer also has a 401(k) plan, you can now contribute $19,000 a year pre-tax maximum for 2019. Combining the 401(k) and Roth IRA allows for $26,000 a year per person in tax-advantageous retirement savings plus any company match.
Income-Tax and Penalty Free Roth IRA Withdrawal
If you so happen to need the Roth IRA money for whatever reason, you need to follow several rules in order to withdraw the money penalty-free.
1) The first requirement is that the withdrawal must be taken five years or more after the account was opened. The IRS counts the five years from the first day of the tax year in which you make your first Roth contribution. In other words, if you open the account on Dec 1, 2019, the IRS actually starts the clock at the beginning of the tax year, that is, Jan. 1, 2019.
2) If you satisfy the five-year time requirement, the IRS says distributions qualify to be both income-tax and penalty free if:
- the money is used to buy, build or rebuild a first home, up to a $10,000 maximum that is spent within 120 days of the withdrawal
- the money is withdrawn because you suffered a disability
- the money is distributed to your beneficiaries or to your estate after you die
When a withdrawal fits these requirements, it is called a “qualified distribution.”
Penalty Free: Higher Education and Medical
Certain other withdrawals still require you to pay income tax, but the IRS won’t punish you with an additional 10 percent early withdrawal penalty. The most common is for higher education expenses.
You don’t have to pay the penalty if the withdrawal is for less than or equal to the amount you pay that year for tuition, books, room and board, etc.
Some kinds of unreimbursed medical expenses also qualify. It’s always best to check with the IRS website for more information.
The Back Door Roth IRA
Do note there is this thing called the Mega Backdoor Roth IRA Conversion, which is an indirect way to contribute to a Roth IRA when you are not eligible to contribute directly due to high income.
Step 1 – Maximize Your After-Tax 401k Contributions
The first additional step for the Mega Backdoor Roth IRA is that you need to figure out how much to contribute to maximize your after-tax 401k contributions.
This means understanding your employer’s plan, and then making the additional contributions. This can be a challenge because many plans require you to specify a percentage of your paycheck, versus a set amount. You also want to make sure that these contributions are after-tax, not Roth 401k contributions.
Mega Step 2 – Withdraw The After-Tax Portion To A Roth IRA
Once you’ve maxed out your after-tax contribution, you can withdraw that portion to a Roth IRA if your employer allows in-service non-hardship withdrawals.
Otherwise you need to wait until termination, and you can rollover the after-tax portion into a Roth IRA.
If you have any earnings on the after tax portion, that amount is taxable on the transfer (since it was tax free growth in your 401k). However, if you’re doing the transfers regularly, the earnings should be minimal.
If you have excessive earnings, you should transfer the contributions to a Roth IRA and the earnings to a traditional IRA. Keep accurate records.
Confused? Understandable. The best solution is to ask the online brokerage that provides the Roth IRA for clarity on example how to execute a backdoor Roth IRA.
Take Advantage Of The Roth IRA
If you earn below the income thresholds, you might as well open a Roth IRA account with any online brokerage account and contribute the maximum. You won’t regret saving for retirement when it’s time for you to take things easier. Instead, you’ll be ecstatic that you saved and invested for so long. Long-term, stocks and bonds have performed well.
I retired early in 2012 at the age of 34. Although I diligently maxed out my 401(k), I’m not able to tap these funds penalty-free until 2036. It would have been great if I had built a Roth IRA to have the flexibility to use the money. But looking back at my historical income, I breached the limit after the a couple years of working, so there was nothing I could do on the Roth IRA front.
Instead of building a Roth IRA, I built an after-tax portfolio that was generating about $80,000 a year in passive income by the time I left work for good. It also helped that I negotiated a severance to give me a financial runway for several years as well.
Bottom line: If your employer offers a Roth IRA and if your income is low enough, you might as well max out the $6,000 contribution. Your post-tax contributions get to compound tax-free and you get to withdraw contributions penalty-free if you have the account open for more than five years.
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