A Roth IRA phaseout is the income level at which your contribution to these after-tax retirement savings accounts can be reduced or "phased out" completely. The amount you can invest each year is limited based on your filing status and your modified adjusted gross income (MAGI). The maximum income amount changes every year.
For taxpayers below a certain amount of income, there is a yearly contribution limit for Roth IRAs. Conversely, taxpayers earning above a set amount of income are prohibited from contributing to a Roth IRA at all for that year. Beyond those limits, there is a gray area in which specific income levels qualify you for partial contributions to a Roth IRA below the annual maximum.
Learn more about how to plan your retirement savings if you use a Roth IRA and expect that your income might limit how much you can contribute in a particular year.
Definition and Example of Roth IRA Phaseout Limits
Roth IRA phaseouts are the income level at which your contribution to your Roth can be reduced or eliminated completely.
Roth IRAs provide some helpful benefits, including the ability to be taxed at your current rate and receive distributions tax-free during retirement. However, Roth IRAs were not created for high-income earners. No individual making $144,000 or more in MAGI or a couple jointly filing making $214,000 or more can contribute to one in the year that they reach or exceed those amounts of income.
The Roth IRA is structured in a way that allows a reduced annual contribution at a point before you reach the phaseout amount applicable to you.
To see where your income falls among these limits, you’ll first need to calculate your modified AGI, figured as part of your tax return. It will include some of the IRS’ adjustments to income, such as contributions to other retirement accounts.
Let’s say you are a single taxpayer making $135,000 as your modified AGI in 2022. In that year, the Roth IRA phaseout limits apply to single taxpayers if they make $129,000 or more but less than $144,000 per year.
In this example, the phaseout limit for your Roth IRA would be calculated this way: First, you subtract $129,000 from your income, yielding $6,000. Divide that number by $15,000, resulting in the number 0.4. Next, multiply this number by the individual Roth IRA limit for someone under age 50 for that year, $6,000, yielding a result of $2,400.
Last, subtract $2,400 from $6,000 to arrive at the result that, at $135,000 modified AGI, you can contribute $3,600 to your Roth IRA for tax year 2022.
How Does the Roth IRA Phaseout Limit Work?
IRS rules dictate that taxpayers in 2022 who are married filing jointly and make between $204,000 up to less than $214,000 in modified AGI, or those who are single, head of household, or married filing separately without sharing a residence earning $129,000 up to less than $144,000 can contribute a partial amount to a Roth IRA for the year.
If you or your tax accountant has calculated that your modified AGI lands within the Roth IRA phaseout limits, you’ll do some fairly simple math to calculate an amount between $0 and the maximum $6,000 that is appropriate for you to contribute to a Roth IRA, as shown in the example above.
Again, the process begins with subtracting either $204,000 if filing jointly or as a qualifying widow or widower, or $129,000 as an individual from your modified AGI. Then divide that result by either $15,000 for individuals or $10,000 for filing jointly/qualifying widow/widower. You multiply the fraction that results by $6,000—the current maximum contribution limit for people under age 50—and subtract the result from $6,000, yielding your partial contribution amount.
Many people don’t know just how many deductions they will qualify for or how much income their business will produce in a year, which leaves their Roth IRA phaseout limit in doubt. The wisest plan, if you know you will be in the ballpark of these income numbers, is to wait until the close of the tax year to contribute to your Roth IRA.
You can make a contribution for the prior year until April 15 of the following year, so a person contributing for their 2021 tax year has until April 15, 2022, to make that contribution. Because you should have a clearer picture of your 2021 modified AGI in early 2022, you then can contribute up to the limit the Roth IRA phaseout allows for your particular income.
What It Means for Individual Taxpayers
In practice, most people won’t fall into the narrow band of income where Roth IRA phaseouts happen most years, but if you’re close, you may want to talk to your tax preparer about optimization strategies.
Contributing to a qualifying health savings account (HSA) reduces your taxable income and could bring your modified AGI down below the phaseout zone.
If you are prioritizing Roth IRA contributions, making an HSA contribution could help you make a maximum Roth IRA contribution, even if you’d be in the phaseout zone without doing so.
Another practical result for individual investors is that sometimes one’s modified AGI ends up higher or lower than expected after you chose to make earlier Roth IRA contributions.
If you contributed more than your maximum in a given tax year, those contributions do accrue tax at a 6% rate per year, but they stop accruing this extra tax when you withdraw your excess contributions and any income you earned on them. Because calculations from year to year can be tricky, the wisest course is usually to wait until your full compensation and tax picture becomes clear in the beginning of the next year.
- People with modified adjusted gross income under a certain level can contribute up to a set maximum to their Roth IRA accounts each year. This was $6,000 per individual under age 50 for tax years 2019-2022.
- People with a MAGI above a certain level don’t qualify to contribute anything to their Roth IRA during the year when they make more than that income cutoff.
- For people who fall in the area just below the income cutoff, there is a calculation to determine the allowed amount of your contribution for the year to your Roth IRA.
- If you think your income and qualifying deductions might land you in this ballpark in a particular tax year, it’s wise to wait until after year-end to choose what Roth IRA contribution to make, so you can avoid an accidental excess contribution, which is taxed.