Most taxpayers can open and contribute to these accounts, but there are some rules in place that will exclude others. Here’s a closer look at who can open a Roth IRA, along with workarounds and alternatives if you don’t qualify.
Roth IRA Earned Income Rules
One of the main requirements you must meet to make Roth IRA contributions is having earned income. Earned income includes all of the taxable income and wages you earn while working for yourself, someone else, or a business you own. For example, it includes wages, salaries, tips, and freelance income. On the other hand, earned income doesn’t include unemployment benefits, child support, alimony, interest, dividends, pensions, Social Security, or annuities.
Roth IRA Contribution Limits
When you’re ready to make a contribution to a Roth IRA, you will find you can only contribute so much. The Internal Revenue Service (IRS) sets rules each year to limit how much you can invest in all of your IRAs—not just your Roth IRA. For example, in 2022, you can only contribute up to $6,000 into IRAs if you’re 49 years old or younger. If you’re 50 or older, you can contribute up to $7,000 per year. Once you hit the contribution limit, you’ll have to wait until the following year to make more contributions. That said, if for some reason you contribute more than the allowed amount into your Roth IRA, it will be taxed at 6% per year for each year it stays in the IRA. You can avoid the tax by withdrawing excess contributions, along with any income earned on them, by the date your individual income tax return is due the following year.
Roth IRA Income Limits
While you need earned income to qualify for Roth IRA contributions, earning too much can disqualify you. The IRS contribution limits mentioned above begin to lessen once a certain income threshold is reached, measured by your modified adjusted gross income (MAGI). Here’s a look at the current income limits, based on your tax filing status, and how they’ll impact the amount you can contribute:
IRS Worksheet 2-2
Opening a Roth IRA for Your Spouse
If one spouse doesn’t have earned income but the other does and you file a joint tax return, both can open separate IRAs in their names under the spousal Roth IRA rules. Your contribution limit will then increase to either double the annual IRA contribution limit or your joint taxable income, whichever is less. For example, if you are 45, make $175,000 per year, and your spouse doesn’t work, you could open two Roth IRAs and contribute $6,000 to each account each year, for a total of $12,000 in annual contributions.
Backdoor Roth IRAs
While Roth IRAs exclude contributions from high earners, a backdoor Roth IRA is a legal way you can contribute through a backdoor conversion. You will first need to invest your money into a traditional IRA account and then can convert it into a Roth IRA. While this option is available as of the time of publication, it may not be forever. Future legislation could aim to limit the ability of high-income earners to convert their savings into Roth IRAs and Roth 401(k)s.
Alternative Retirement Investments
If you don’t qualify to contribute to a Roth IRA or would like to compare other retirement investment options, here are a few alternatives. For one, if you’re employed and your employer offers a 401(k) plan, make sure you’re taking full advantage of that account and any company matching available. Further, does your company offer Roth 401(k)s? While 401(k) distributions are subject to income taxes, Roth 401(k)s offer tax-free disbursements like Roth IRAs but don’t have any income limitations. Second, while it’s still an option, you could open a traditional IRA and use the backdoor Roth IRA strategy to convert it. Further, you could consider investing in a brokerage account, which enables you to purchase a variety of investments, from stocks and bonds to exchange-traded funds (ETFs). You won’t reap tax advantages in this case, but can grow your money without worrying about contribution limits and early withdrawal penalties. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
If you’re under 59½ and the account is less than five years old, withdrawals of earnings can come with a 10% early withdrawal penalty and will be subject to taxes. The penalty can be waived under certain qualifying situations, but not the taxes. If you’re under 59½ and you’ve had the account for at least five years, earnings withdrawals will be subject to taxes unless you meet one of the exceptions.If you’re over 59½ but haven’t had your Roth IRA for five years yet, your earnings withdrawals will be subject to taxes but not penalties. If you’re over 59½ and have had the Roth IRA for at least five years, your earnings withdrawals won’t be subject to taxes or penalties.
