Each year, the IRS updates the annual contribution limits for IRA and Roth IRA accounts.
These limits include:
1) How much you can contribute annually
2) How much you can earn on an annual basis and remain eligible to contribute
So let's take a look at where these limits stand for the 2010 tax year.
The Roth IRA Annual Contribution Limit For 2010
Assuming you're eligible to contribute, the maximum Roth IRA contribution limit for 2010...
• $5,000 if you're under age 50
• $6,000 if you're over age 50
This means you can contribute no more than $5,000 to your Roth for the 2010 tax year if you're under 50 and no more than $6,000 if you're over 50.
However, don't just assume that you're eligible to contribute the maximum just because you're eligible to make a Roth contribution.
Why?
Because an individual's ability to contribute phases out from the maximum $6,000 to $5,000 range all the way to zero. Your personal annual maximum contribution limit might fall somewhere in between.
So what causes your contribution limit to phase out?
Income.
The amount of income you earn for the 2010 tax year dictates how much you're eligible to contribute.
So let's take a look at the income limits...
The 2010 Roth IRA Income Limits
Your ability to make a Roth IRA contribution in any given year depends on your level of income given your tax status for the year. Earn more than the predetermined IRS threshold, and you're ineligible to contribute.
So before you make a Roth IRA contribution, make sure you meet the income eligibility requirements. Let's look at the rules for an individual in each tax status.
Married Filing Jointly
If you're married, and you file a joint tax return, then you can contribute a maximum of...
• $6,000 if you're over 50 and your combined earned income is $167,000 or less
• $5,000 if you're under 50 and your combined earned income is $167,000 or less
• $0 regardless of age if your combined earned income is more than $176,000
If your annual income falls somewhere between $167,001 and $176,000, then the annual contribution limit for your Roth IRA phases out.
For instance, say you're 39 years old with a combined income of $171,000. In such a case, your contribution limit is 50% of what it would otherwise be if you earned $167,000 or less.
Why?
Because $171,000 is the midpoint between $167,000 - $176,000 range, and the annual contribution limits phase out on a percentage basis depending on where your annual income falls within the aforementioned range.
So if your maximum annual limit is $5,000 at $167,000 in annual income, it's $2,500 at $171,000 in annual income.
Likewise, if your maximum annual limit is $6,000 at $167,000, then it's $3,000 at $171,000.
Married Filing Separately (And Lived With Your Spouse)
If you're married filing separately, and...
You lived with your spouse for any part the year, you can contribute a maximum of...
• $6,000 if you're over 50 and your earned income is $0
• $5,000 if you're under 50 and your earned income is $0
• $0 regardless of age if your earned income is $10,000 or more
If your earned income is somewhere between $1 and $10,000, then your annual contribution limit phases out.
The phase out provision is the same for everyone, regardless of tax filing status. Under the phase out rules, your annual limit phases out on a percentage basis depending on where your income level falls within the $1 to $10,000 range.
Single, Head of Household, or Married Filing Separately (Did NOT Live With Spouse)
If you're either single, head of household, or married filing separately (and didn't live with your spouse for any part of the year), you can contribute a maximum of...
• $6,000 if you're over 50 and your earned income is $105,000 or less
• $5,000 if you're under 50 and your earned income is $105,000 or less
• $0 regardless of age if your earned income is $120,000 or more
If your annual income is somewhere between $105,001 and $120,000, then your annual contribution limit phases out.
The phase out provision is the same as for someone who is married and files a joint tax return with the IRS. Your annual limit simply phases out on a percentage basis depending on where your income level falls within the $105,001 to $120,000 range.
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