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Roth IRAs and income
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November 3, 2000: 11:05 a.m. ET
Tips on Roth IRA contributions and determining benefit phase-out rules
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NEW YORK (CNNfn) - Having trouble figuring out the income levels at which Roth IRA benefits begin to phase out. You're not alone. It's a complicated equation and it may be wise to obtain expert advice before making a contribution.
In response to a reader's question, Melissa Buie, a certified financial planner from Falls Church, Va., walks through the process step-by-step.
Ask the experts a question
Can you give more detail on the phasing out of the Roth IRA between adjusted gross income (AGI) of $95,000 and $110,000? How exactly does it work? At $110,000 how much are you allowed - $1,000 instead of $2,000 or less than $1,000?
You asked what seems like a simple enough question. We'll see what you think after you read this answer. It's amazing it could be this complicated, but it is:
If Modified Adjusted Gross Income (MAGI) is $95,000 or below for a single person, $150,000 or below for married people filing jointly, there is full eligibility for a $2,000 (per person) Roth IRA contribution. Above these MAGI amounts, the contribution limit is reduced. If MAGI is within the $95,001 - $110,000 for singles, $150,001 - $160,000, for marrieds filing jointly (mfj), the Roth contribution limit is reduced as follows:
- Begin with MAGI (see definition below)
- Subtract from that amount $95,000 (single)/$150,000 (mfj)
- Divide the result from (2) above by $15,000 (single)/ $10,000 (mfj)
- Multiply $2,000 by the result from (3)
- Subtract that amount from $2,000. That is your contribution amount. Married persons filing jointly can EACH make this contribution.
- Total IRA contributions (regular and Roth, not Education IRA's) can not exceed $2,000 per person or taxable compensation, whichever is less.
If your result is less $200 but more than $0, the maximum contribution is $200.
Example: Katie is single with modified AGI of $98,000. Her allowable contribution to a Roth IRA is $1,600. $98,000-$95,000 = $3,000. $3,000/$15,000 = .20. $2,000 x.20 = $400 contribution reduction. $2,000 - $400 = $1,600.
Modified Adjusted Gross Income (MAGI) for Roth IRA contributions is your AGI plus any traditional IRA deductions, any foreign earned income exclusion or foreign housing cost exclusion or deduction, any Social Security/RR, any passive losses, any series EE bond interest that was excluded, and any employer paid adoption expenses that were excluded.
If you're still with me after all that, congratulations. And if you still have the energy to make the Roth contribution, I would suggest that you use a good tax preparer or a good piece of tax prep software to make sure you get this right!
The value of the tax-free compounding of earnings on Roth contributions is a great tool to take advantage of for saving for your retirement, so it's definitely worth the effort.
FPA 
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