Eligibility to contribute to a Roth IRA also depends on your total income. The IRS sets income limits that restrict people with high incomes. The limits are based on your modified adjusted gross income (MAGI) and your tax-reporting status. The MAGI is calculated by taking adjusted gross income (AGI) from your tax return and adding up deductions for things like student loan interest, self-employment taxes, and higher education expenses.
Eligibility to contribute to a Roth IRA is based on household income. The IRS routinely adjusts the MAGI limits and contribution limits to account for inflation. Most people won't need to worry about Roth IRA income limits, but if you have a high income, keep them in mind so you don't accidentally end up contributing too much to a Roth IRA. This table shows if your contribution to a Roth IRA is affected by the amount of your modified AGI as calculated for the Roth IRA.
You'll also learn about alternative options for getting the benefits of a Roth IRA if you earn more than the Roth IRA limits. You can use a clandestine Roth IRA in which you contribute money to a traditional IRA and then convert it into a Roth IRA. The five-year Roth IRA rule states that you can't withdraw your earnings tax-free until at least five years after you've first contributed to a Roth IRA. Keep in mind that all contributions to your IRA count toward the same limit, so if you've also contributed some money to a traditional IRA this year, that could further reduce your maximum contribution to a Roth IRA.
In addition, the maximum deductible amount you contribute to a traditional IRA and the maximum amount you contribute to a Roth IRA may be reduced depending on whether or not you are covered by an employer-sponsored retirement plan and your income. Under certain conditions, Roth IRAs also allow tax-free earnings to be withdrawn, which are subject to taxation in a traditional IRA. You may be able to get around income limits by converting a traditional IRA to a Roth IRA, which is called a clandestine Roth IRA. Every year you make a contribution to the Roth IRA, the custodian or trustee will send you Form 5498 with information about IRA contributions.
The advantages of a Roth IRA, compared to a traditional IRA, include qualified tax-exempt distributions and the ability to withdraw any amount of your capital without penalty. In addition, transfers from one Roth IRA to another are not taken into account for the purpose of making annual contributions.