8.20 Annual Contributions to a Roth IRA
You may make a nondeductible Roth IRA contribution for 2012 if you have taxable compensation for personal services and your modified adjusted gross income (MAGI) does not exceed the upper end of the phaseout range. The contribution is not reported on your tax return.
For 2012, the phaseout range does not begin until MAGI reaches $110,000 if you are unmarried (single or head of household), or $173,000 if you are married filing jointly or a qualifying widow(er). If your 2012 MAGI is under that phaseout threshold, you may contribute up to the 2012 contribution ceiling, which is $5,000 if you are under age 50 or $6,000 if you are age 50 or older by the end of the year, assuming you have taxable compensation of at least that much (the contribution cannot exceed the compensation).
If your 2012 MAGI exceeds the applicable $110,000/$173,000 phaseout threshold, the phaseout rule applies and your contribution limit is either partially or fully phased out. The $5,000/$6,000 contribution limit is phased out for unmarried taxpayers with MAGI of over $110,000 and under $125,000 and for married joint filers with MAGI of over $173,000 and under $183,000. If MAGI equals or exceeds the $125,000 or $183,000 limit, you cannot contribute to a Roth IRA for 2012; the contribution limit is completely phased out.
A stricter phaseout rule applies to a married person filing separately who lives with his or her spouse at any time during the year. In that case, the contribution limit is phased out over the first $10,000 of MAGI. No contribution is allowed if MAGI is $10,000 or more. However, a married person who lives apart from his or her spouse for the entire year is treated as unmarried, subject to the same phaseout range as single persons and heads of household.
Individuals who qualify to make both deductible contributions to a traditional IRA (8.4) as well as nondeductible Roth IRA contributions should consider whether the tax value of deductible traditional IRA contributions is outweighed by the value of future tax-free distributions from the Roth IRA (see 8.23 for the Roth IRA distribution rules). You can contribute to both a Roth IRA and traditional IRA for the same year, but total contributions are subject to the annual contribution limit ($5,000/$6,000 for 2012) as discussed below. If you decide to contribute to a traditional IRA to get a tax deduction, you can in a later year transfer the funds to a Roth IRA by making a taxable conversion (8.21).
The Roth IRA rules do not replace the traditional IRA nondeductible contribution rules (8.6). For an individual who is unable to contribute to a Roth IRA because the contribution limit is phased out, and is unable to make deductible IRA contributions because of the phaseout rules for active plan participants (8.4), nondeductible contributions may still be made to a traditional IRA (8.6).
Spousal contribution on joint return for nonworking or low-earning spouse.
If you are married filing jointly, you generally may contribute up to the annual limit (see above) for each spouse to a Roth IRA so long as the total compensation of both spouses is at least double the limit. This is the same spousal contribution rule as for traditional IRAs (8.3); the lower-earning spouse is allowed to “borrow” compensation of the higher-earning spouse for contribution purposes. However, the Roth IRA contribution limit may be reduced because of the MAGI phaseout rules, discussed below.
MAGI phaseout of 2012 Roth IRA contribution limit.
The $5,000 or $6,000 Roth IRA contribution limit for 2012 (see above) is phased out if your 2012 modified adjusted gross income (MAGI) is between:
- $173,000 and $183,000, if you are married filing jointly, or a qualifying widow(er);
- $110,000 and $125,000, if you are single, head of household, or married filing separately and you lived apart for the entire year;
- $0 and $10,000, if you are married filing separately and you lived with your spouse at any time during the year.
If MAGI equals or exceeds the applicable $183,000, $125,000, or $10,000 limit, no Roth IRA contribution for 2012 is allowed.
For 2013, the $110,000 and $173,000 phaseout thresholds may be subject to inflation indexing; see the e-Supplement at jklasser.com for an update.
For purposes of the phaseout rule, MAGI is figured in the same way as under the traditional IRA deduction phaseout rules (8.4), except that a taxable conversion (8.21) from a traditional IRA to a Roth IRA is disregarded. The MAGI phaseout rule applies to Roth IRA contributions regardless of whether you are covered by an employer retirement plan, unlike the deductible traditional IRA phaseout rules (8.4), which apply only to active plan participants.
If your MAGI exceeds the phaseout threshold for your filing status, the contribution limit is reduced by a phaseout percentage determined by dividing your “excess MAGI” (MAGI over phaseout threshold) by the phaseout range (which is either $10,000 or $15,000, depending on your filing status as shown above). The Example below illustrates how the phaseout limit is computed. If the phaseout formula results in a reduced contribution limit that is not a multiple of $10, round it up to the next highest $10. If the reduced limit is between $0 and $200, you are allowed a $200 contribution limit.
Law Alert
Contributing to Roth IRA and traditional IRA for the same year.
If you contribute to both a traditional IRA and Roth IRA for the same year, total contributions for the year to all the accounts are limited to the annual limit, or your compensation if that is less. The annual limit is applied first to the traditional IRA contributions and then to the Roth IRA contributions. Thus, the maximum contribution limit for 2012 to a Roth IRA is the lesser of (1) $5,000, or $6,000 if age 50 or older, or (2) taxable compensation, minus deductible (8.4) or nondeductible (8.6) contributions to traditional IRAs.
Planning Reminder
However, if you are subject to the MAGI phaseout for Roth IRA contributions, as discussed above, the maximum Roth IRA contribution limit is the lesser of these two amounts: (1) the annual contribution limit (see above) or, if less, compensation, minus contributions for the year to traditional IRAs, or (2) the contribution limit figured under the Roth IRA MAGI phaseout rule.
Excess contributions.
If Roth IRA contributions exceed the allowable limit, the excess contribution is subject to a 6% penalty tax unless you withdraw the excess, plus any earnings on the excess contribution, by the filing due date including extensions. The earnings must be reported as income for the year the contribution was made. If you timely file your 2012 return without withdrawing an excess contribution made in 2012, the IRS will give you until six months from the original (unextended) due date (April 15, 2013) to make the withdrawal, or until October 15, 2013, and an amended return must be filed for 2012 to report the earnings on the withdrawn contributions; see the instructions to Form 5329.
Contribution deadline.
Contributions to a Roth IRA for a year may be made by the filing due date, without extensions. For 2012 contributions, the deadline is April 15, 2013.