Roth IRA Phaseout

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As I stated before, Roth IRA’s are the greatest thing since sliced bread. Their only disadvantage is if you make too much money.  What? The government disciplining you for making too much money?  That’s absurd, right?  Sorry, not the case. The Roth IRA has what is called Phase Out limits.  We are not talking about that phase were tie dyed shirts  were in and now they are out (hence the groovy pic).  Phase out applies to whether you are allowed to contribute to a Roth IRA in full, partial, or not at all.

Roth IRA Contribution Amounts Revisited

Let’s review the contribution amounts again.  In 2008, you are eligible to contribute $5000 into a Roth IRA, $6000 if you are over the age of 50.  Now let’s look at the IRA Phase Out tables:

          Filing Status                                   Modified Adjusted Gross Income

Single/Head of Household                         $101,000-$116,000
 
Married/Jointly                                             $159,000-$169,000
 
Married/Seperate                                                  $0-$10,000
 

Don’t Forget About MAGI

First item I want to point out is that we are dealing with Modified Adjusted Gross Income here.  Do not over look that.   In looking at the chart above lets use the Single/Head of Household as our ongoing example and assume that the person is under the age of 50.

Roth IRA Phaseout Examples

Example 1

MAGI is $95,000. This is an easy one.  Contribution allowed is $5000.  Isn’t this simple so far?

Example 2

MAGI is $120,000.  Congratulations!  You officially made too much money and cannot have a Roth IRA.  Please send your thank you cards compliments to the IRS.  Don’t fret.  You still may be able to contribute to a traditional IRA.  We’ll discuss that later.

Example 3

MAGI is $110,000.  This is where it gets a little tricky.  You might want to break out your calculators on this one or just follow these easy steps.

Step 1. Find the amount of the phase for you. In our example, the phase is $15,000. ($116,000-$101,000).

Step 2. Subtract your AGI from the upper amount of the phase. We would use $116,000-$110,000 = $6000.

Step 3. Divide the amount in Step 2 ($6000) by the phase range ($15000) to arrive at .4 or 40%

Step 4. Take 40% of the contribution limit of $5000 for a total contribution limit of $2000. So $2000 is the full amount that a single/head of household under the age of 50 could contribute to their Roth IRA with an AGI of $110,000. That wasn’t so bad, was it?

Hopefully, all that math doesn’t have you “phased out”. But now you know if you are eligible for the Roth IRA

Securities offered through LPL Financial, Member FINRA/SIPC.

Tagged as: Roth IRA, Roth IRA Phaseout