Making Roth IRA Contributions – Single, Head of Household and Married Filing Joint – Eligibility & Examples

Making Roth IRA contributions has gotten ever more complex with increased rules & regulations that control your contribution limits, eligibility, modified adjusted gross income, etc. In this article, we will explore Roth IRA contributions in greater detail and compare them with making contributions to other IRAs.

A Roth IRA investor can make an annual non tax-deductible contribution to a Roth IRA that may not exceed

i) the maximum Roth IRA contribution limit set by the IRS or

ii) 100% of the individual’s earned income for the year

minus

iii) the sum of all contributions to all other individual retirement plans for that year (other than an Education IRA).

Do you see how a simple Roth IRA concept can get so complicated? Let’s explain these clauses. This means that the total contributions you make towards both a traditional IRA and a Roth IRA cannot exceed the defined contribution limit for that year. It is therefore better to pick only 1 out of the two options; traditional IRA or Roth IRA and make the total allowable contribution to it. For example if John has $5000 to contribute towards his IRAs, he would be better off putting all the $5000 to a Roth IRA, as opposed to contributiong $1500 to a traditional IRA and $3500 to a Roth IRA. This eliminates the administrative costs of maintaining & signing up for two different retirement programs, as well as broker fees, etc.

Here are 2 important notes to remember about Roth IRA contributions:

i) You can contribute to a Roth IRA and a Simple/SEP/Education IRA at the same time. The annual contribution limit to IRAs is applicable only to traditional & Roth IRAs; not the Simple/SEP/Education IRAs. Therefore if you have the money to make 100% of allowable contributions to a Roth IRA as well as a Simple or SEP or Education IRA, then by all means you can do so!

ii) You can contribute to a Roth IRA even if you are already enrolled in a company sponsored 401k/profit sharing plan.

Example

Consider Mohammed who is a programmer and earns $60,000 a year. Mohammed contributes to his employer sponsored 401k plan as well as the company’s pension plan. In his spare time, Mohammed runs an auto detailing shop from his basement that nets him an extra $10,000 a year. Mohammed will therefore make an SEP IRA contribution based on his net business income. Mohammed also contributes to an Education IRA for the benefit of his son, Ahmed. The beauty of Roth IRAs is that despite of all these contributions to a 401k, SEP IRA and an Education IRA, Mohammed can contribute a further $5000 to a Roth IRA for the year 2010. This is because $5000 is the total allowable contribution that can be made to a Roth IRA in 2010.

Note: A qualified rollover contribution to a Roth IRA does not count in the maximum annual contribution limit. In the example above, Mohammed could make a qualified rollover contribution from his SEP IRA to his Roth IRA and that amount would not count as part of the $5000 contribution limit; meaning MOhammed could contribute an additional $5000 on top of his qualified rollover contribution. Beauty!

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