Roth IRAs don't get as much respect as they deserve. These retirement savings vehicles share a lot in common with traditional IRAs, in that they both offer tax incentives to those looking to set money aside for their golden years. Yet the fact that Roth IRAs grow on a tax-free basis throughout your career and are available for tax-free withdrawals in retirement distinguishes them from their traditional IRA counterparts. Having both kinds of accounts in your retirement savings arsenal can be a powerful combination.
Unfortunately, not everyone qualifies to contribute to a Roth IRA. If your income is above certain limits that change nearly every year, then your ability to make Roth IRA contributions can go away. Below, we'll look at the new Roth IRA income limits for 2020, how they've changed from 2019's figures, and what they mean for you and your retirement savings strategy.
Can I contribute the full amount to my Roth IRA in 2020?
The income limitations on Roth IRA contributions don't affect the vast majority of taxpayers, who can therefore save up to the maximum annual contribution limits. In 2020, these amounts will stay the same as they were in 2019. Those under 50 will be able to save up to $6,000 in a Roth IRA, and those 50 or older will get an extra $1,000 catch-up contribution to bring their total permitted savings to $7,000.
However, if your income exceeds the numbers below for your particular filing status, then the amount of your Roth IRA contribution will get reduced.
For this filing status:
Contributions are reduced if income is above this amount
No contribution is allowed if income exceeds this amount
Single, head of household, or married filing separately IF you didn't live with your spouse during the year
Married filing jointly or qualifying widow or widower
Married filing separately IF you lived with your spouse at any point during the year
These numbers are up slightly from 2019's limits. The set of limits for singles is higher by $2,000, while the joint filers' limits are higher by $3,000 compared to 2019.
It's important to understand exactly what counts as income for purposes of applying these limits. Modified adjusted gross income includes just about every form of taxable income you earn, including wages and salaries, investment income, business income, taxable distributions from retirement accounts, and gains from sales of investment assets. However, it doesn't include any income you're required to include from having contributed regular retirement assets to Roth IRAs. You're also allowed to deduct certain items, including contributions to health savings accounts and penalties on early withdrawal from bank certificates of deposit.
How much less will I be able to contribute?
To figure out the impact of these limits on your permitted contributions, you'll have to do some math. Two cases are easy: If your income is below the lower number in the left column of the table above, then there's no limitation on your Roth contribution at all. If your income is above the higher number in the right column of the table, then you're not allowed to make any Roth contribution.
Where things get trickier is when your income is between the two numbers above. Notice that the range between the two income numbers is $15,000 for single filers and $10,000 for most married filers. So if you take the amount by which your income exceeds the lower end of the range and divide it by the size of the range, you'll get a percentage figure that will tell you how big a percentage you'll have to reduce your maximum Roth IRA contribution.
An example can help show how this works. Say that you're single and your modified adjusted gross income is $130,000. That's $6,000 over the $124,000 lower limit, which is 40% of the $15,000 range for singles. Therefore, you'll reduce your maximum Roth IRA contribution by 40%. That works out to $3,600 if you're younger than 50, or $4,200 if you're 50 or older.
What if I want a Roth but make too much money?
If your income is above the limits above and you can't make a Roth contribution, one thing you can consider is opening what's known as a backdoor Roth IRA. This involves a two-step process:
- Contribute to a traditional IRA. There aren't any income limits for these contributions, although your contribution might not be tax deductible if your income is too high.
- Convert that traditional IRA to a Roth IRA. No income limits apply to Roth conversions.
The only complication is that if you have other money already in an existing traditional IRA, this can end up costing you more in taxes.
An alternative is to use a Roth 401(k) if you have access to one at work. Income limits on Roth IRAs don't apply to 401(k) contributions, even if they're to a designated Roth option.
Open a Roth if you can
The tax advantages of Roth IRAs make them a great way to save for retirement. If the income limits don't prevent you from opening a Roth, diverting some of your retirement savings to a Roth IRA could pay off for you in the long run.
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