Income limits rise for Roth IRAs

The maximum amount retirement savers can contribute to a Roth IRA for 2018 is unchanged from 2017. However, the income limits to qualify for the maximum contribution to a Roth IRA are higher for 2018 than they were for 2017.

The maximum amount workers can contribute to a Roth IRA for 2018 is $5,500 if they’re younger than age 50. Workers age 50 and older can add an extra $1,000 per year in “catch-up” contributions. The $6,500 maximum contribution amount is the same as 2017.

The actual amount that you are allowed to contribute to a Roth IRA is based on your income. To be eligible to contribute the maximum for 2018, your modified adjusted gross income must be less than $120,000 if single or $189,000 if married and filing jointly. Contributions begin to be phased out above those amounts, and you can’t put any money into a Roth IRA once your income reaches $135,000 if single or $199,000 if married and filing jointly.

Roth IRA income limits are higher for 2018 than they were for 2017, when your modified adjusted gross income had to be less than $118,000 if single or less than $186,000 if married and filing jointly to qualify for the maximum contribution. If your 2017 income was above those limits, you could still qualify for a partial contribution if you were single and your MAGI was greater than or equal to $118,000 but less than $133,000, or if you were filing jointly and your MAGI was greater than or equal to $186,000 but less than $196,000. You couldn’t contribute to a Roth IRA for 2017 once income hit $133,000 for singles or $196,000 for joint filers.


Roth IRAs vs. Traditional IRAs


Unlike contributions to a traditional IRA, which may be tax-deductible, a Roth IRA has no up-front tax break. Money goes into the Roth after it has already been taxed. But when you start pulling money out in retirement, your contributions and all the earnings will be tax-free.

You can open a Roth IRA through a bank, brokerage, mutual fund or insurance company, and you can invest your retirement money in stocks, bonds, mutual funds, exchange-traded funds and other approved investments.

Roth IRAs can help you build a sizable nest egg if you start saving early enough. For example, a 25-year-old who contributes $5,500 a year to a Roth IRA and has an annual return of 6 percent will accrue a nest egg of $902,262 by age 65. If that 25-year-old is in the 22 percent tax bracket and invested $5,500 a year in a taxable account earning a 6% annual return, the balance after 40 years would amount to about $643,500.

The difference is the brake that having to pay the IRS on each year’s earnings puts on compounded growth. If you can’t afford to save the entire $5,500 without the help of a tax deduction—which, if you contribute to a traditional IRA and write off $5,500 in the 22 percent bracket brings the out-of-pocket cost to $4,290—you might be better off with a traditional IRA.

Roths are also more flexible than traditional, deductible IRAs. You can withdraw contributions to a Roth account anytime, tax- and penalty-free. If you want to withdraw earnings tax-free, though, you must be at least age 59 and a half, and you must have owned the Roth for at least five years. The clock on the five-year holding period starts ticking on Jan. 1 of the year you open the account.

Also, Roths—unlike traditional IRAs—are not subject to required minimum distributions (RMDs) after age 70 and a half. And you can add funds to it at any age, provided you have earned income from, say, a job or self-employment. Traditional IRAs close the door to new contributions once you turn 70 and a half, even if you’re working.

Ed Slott, who is a CPA and an IRA expert in Rockville Centre, N.Y., recommends Roth IRAs for savers of all ages. But, he adds, “the younger you are when you start investing in one, the more advantageous it’ll be because that creates more time for your contributions to compound tax-free.”

There isn’t a minimum age limit to open a Roth IRA, and you can contribute to another person’s Roth account as a gift—perfect for parents looking to kick-start a child’s retirement savings. Two caveats: Recipients must have earned income, and you can only contribute an amount up to that person’s annual earnings or $5,500, whichever is less.

Roths can also provide valuable tax diversification in retirement. Roth IRAs are great “for people who want to balance out their sources of income—meaning that they may already have considerable sources of income that will be taxable in retirement, like a pension, 401(k)s or Social Security, and they want to build up another pot of money that will permit tax-free withdrawals,” says Mari Adam, a certified financial planner in Boca Raton, Fla.

Adam also recommends Roth accounts to anyone planning to leave money to heirs. Though heirs other than a spouse must take distributions from the IRA over time, that money comes out free of any taxes.

Finally, note that if you invest in both a Roth IRA and a traditional IRA, the total amount of money you contribute to both accounts can’t exceed the annual limit. If you do exceed it, the IRS might hit you with a 6 percent excessive-contribution penalty.


Thomas H. Blanton wrote this article for Kiplinger’s Retirement Report. Reprinted with  permission.