Whether you’re new to investing or have contributed to a Roth IRA for years, you may wonder how the maximum contribution limit is determined. After all, knowing your limits is key for ensuring you don’t over-contribute and face unnecessary penalties from the IRS!

Fortunately, understanding how your Roth IRA contribution limit works aren't complicated. This blog post will explain exactly how it's calculated and give tips on increasing it each year where possible. So if you want to become an expert in retirement savings contributions, keep reading.

Understand the Basics of Roth IRA Contributions

Your Modified Adjusted Gross Income determines your Roth IRA contribution limit. This figure is calculated by adjusting the amount you report in your tax return with certain deductions. The general formula for MAGI is Adjusted Gross Income - Deductions = MAGI.

The annual contribution limits for Roth IRAs change yearly and are based on your MAGI and filing status. In 2020, the maximum Roth IRA contribution was $6,000 for individuals under age 50, except those earning more than a certain amount.

For example, if you are single and make an Adjusted Gross Income (AGI) of $120,000 or less, you can contribute up to $6,000 annually. If you are married, filing jointly, and making an AGI of $189,000 or less, you can contribute up to $12,000 for the year.

You may qualify for a reduced contribution limit if your MAGI exceeds these thresholds. The IRS has a formula to calculate your Reduced Limit, which you can find on their website.

In addition to the annual contribution limits, other eligibility requirements exist for contributing to a Roth IRA. To contribute to a Roth IRA, you must be: younger than 70 1/2 years old, have taxable income in the current year, and not participate in an employer-sponsored retirement plan.

Consider Your Filing Status and Income Level

When calculating the max contribution limit of your Roth IRA, the IRS looks at both your filing status and income level. The higher your income is, the lower your contribution limit can be.

Your filing status (single, married, filing jointly, etc.) also affects how much you can contribute each year because it determines your tax bracket. The tax bracket you’re in will help the IRS decide how much of your contribution is considered taxable and, thus, affects how much you can contribute to your Roth IRA.

For example, if you're filing as single and making over $139,000 a year, your contribution limit will be smaller than someone filing as single and making less than $125,000 a year.

The best way to determine your contribution limit is to use the IRS’s interactive tax assistant tool. The tool will help you determine your contribution limit based on income and filing status.

Learn About the Roth IRA Contribution Limits

The Roth IRA is an incredibly useful retirement savings tool, allowing you to contribute after-tax dollars towards a tax-free future. To ensure that everyone can take advantage of the benefits of this tax-advantaged account, the IRS has imposed contribution limits on how much you can invest each year.

Here’s what you need to know:

The maximum annual contribution for Roth IRAs is $6,000 in 2021 (plus an additional $1,000 if you are 50 or older). This number can change yearly depending on the cost of living adjustments, so checking the contribution limit each year is important.

Determine Your Modified Adjusted Gross Income (MAGI)

Your first step in determining your Roth IRA contribution limit is to calculate your Modified Adjusted Gross Income (MAGI). This calculation begins with your adjusted gross income (AGI), then adds or subtracts certain items that do not qualify as AGI. The resulting number is your MAGI. Common contributions added to your AGI include tax-exempt foreign income and deductions for student loan interest.

Calculate the Maximum Contribution Amount Allowed

The maximum amount you can contribute to a Roth IRA for the 2020 tax year is $6,000. If you're age 50 or older, you can make an additional catch-up contribution of $1,000. To determine your maximum allowable contribution limit, several factors come into play:

1. Your Adjusted Gross Income (AGI): Your AGI is your total taxable income before deductions. Generally, the higher your income, the lower your contribution limit.

2. Your Filing Status: If you are married and filing a joint tax return, you're eligible for the maximum contribution amount of $6,000. However, if you file separately, your maximum contribution amount may be lower.

3. Your Participation in an Employer-Sponsored Retirement Plan: If you participate in a 401(k) or other employer-sponsored retirement plan, the IRS may limit your ability to make the full $6,000 Roth IRA contribution. The IRS uses a formula to calculate an adjusted AGI based on whether or not an employer-sponsored plan covers you.

FAQs

How Much Can You Contribute to a Roth IRA?

The average for the 2021 tax year is $6,000 (plus an additional $1,000 for those aged 50 or older).

What Is Modified Adjusted Gross Income?

Modified Adjusted Gross Income (MAGI) is your adjusted gross income after making certain adjustments. It’s used to figure out your eligibility and contribution limits when it comes to Roth IRAs. Common adjustments include tax-exempt foreign income and deductions for student loan interest.

Can You Make Contributions If You Have a Roth 401(k)?

Yes, you can still contribute to a Roth IRA even with a Roth 401(k). The IRS uses a formula based on whether or not an employer-sponsored planter calculates an adjusted AGI. This calculation will determine your contribution limit.

Conclusion

Contribution limits for a Roth IRA are an important factor to consider when planning your retirement savings strategy. A high contribution limit allows you to save more and grow your assets faster than with a regular IRA. Understanding how your Roth IRA contribusion limit is calculated can help you better manage how much you contribute each year. The main factors impacting your savings include filing status, income level, and modified adjusted gross income (MAGI).