roth ira income limit

What Happens If I Exceed The Roth IRA Income Limit In 2024?

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A Roth Individual Retirement Account (IRA) is a popular retirement savings option for many individuals due to its tax advantages. Investment earnings in a Roth IRA are tax-free. However, there’s a catch: there are income limits that determine who can contribute to a Roth IRA. If you exceed these income limits and still contribute to a Roth, you might wonder what happens next. In this blog, we’ll explore the consequences of exceeding the Roth IRA income limit and discuss alternative retirement savings options.

Understanding Roth IRA income limits

The IRS sets Roth IRA income limits and they are subject to change annually. These limits are based on your Modified Adjusted Gross Income (MAGI) and your filing status (single, married filing jointly, etc.).

Roth IRA Income Limits 2024

Filing statusRoth IRA income limitsRoth IRA contribution limits 2024
Single, head of household, or married, filing separately (if you didn't live with spouse during the year)Less than $146,000.$7,000 ($8,000 if 50 or older).
More than $146,000, but less than $161,000.Contribution is reduced.
$161,000 or more.No contribution is allowed.
Married filing jointly or qualifying widow(er)Less than $230,000.$7,000 ($8,000 if 50 or older).
More than $230,000, but less than $240,000.Contribution is reduced.
$240,000 or more.No contribution is allowed.
Married filing separately (if you lived with spouse at any time during the year)Less than $10,000.Contribution is reduced.
$10,000 or more.No contribution is allowed.

Can I contribute to a Roth IRA if my income is too high?

If your income exceeds the Roth IRA income limits, you cannot make direct contributions to a Roth IRA for that tax year. However, you may be able to still contribute to a Roth IRA indirectly by doing a backdoor Roth IRA. We refer to this as the ‘Roth IRA hack’. It involves contributing to a traditional IRA and then converting it to a Roth. You need to follow specific steps to execute this strategy correctly.

It’s essential to consult with a financial advisor or tax professional to explore options available to you if your income is too high to contribute to a Roth IRA.

 

What are the consequences of exceeding the Roth IRA income limit?

The most obvious consequence of exceeding the Roth IRA limit is that you are no longer eligible to make direct contributions to a Roth IRA for the tax year in question. If you’ve already made contributions for the year, you must take corrective action to avoid penalties.

If you don’t take the corrective action, you will face a 6% penalty on the excess contributions for each year they remain in the account. This penalty can add up over time if not addressed promptly. Additionally, any earnings generated by the excess contributions in your Roth IRA may be subject to income tax. This can erode the tax advantages that initially attracted you to the Roth IRA.

 

What corrective measures should I take if I contribute to a Roth IRA when I exceed the Roth IRA income limit?

To avoid the excess contributions penalty and tax on earnings, you have a few options:

Option 1) Recharacterization: You can recharacterize your Roth IRA contributions as traditional IRA contributions if you are eligible to contribute to a traditional IRA. This may help you avoid the penalties and tax on earnings.

Option 2) Withdraw excess contributions: You can withdraw the excess contributions and any earnings attributable to them by the tax filing deadline (including extensions) for the year in question. This will prevent penalties and taxes.

Option 3) Consider other retirement accounts: If you consistently exceed the Roth IRA income limit, you may need to explore other retirement savings options, such as a traditional IRA, 401(k), or a non-deductible IRA. These accounts have different contribution limits and income restrictions.

 

Can I contribute to a Roth IRA if I make over $200k?

Unfortunately, you cannot contribute to a Roth IRA if you make over $200k as an individual. More specifically, you cannot contribute to a Roth IRA if your income exceeds $161,000 for single filers or $240,000 for joint filers in 2024. If you do want to take advantage of a Roth IRA’s tax-free advantages, then you may want to look into a backdoor Roth.

If you find yourself consistently ineligible for Roth IRA contributions due to high income, consider alternative retirement savings strategies to ensure a secure financial future in retirement. To ensure you are still on track for retirement, we recommend consulting with a fiduciary financial advisor.

 

Is a Roth IRA contribution per person or couple?

The Roth IRA contribution limit is per person, not per couple. Each eligible person can contribute to their own Roth IRA account up to the annual contribution limit, regardless of their marital status.

For example, the annual contribution limit for individuals under the age of 50 for 2024 is $7,000. This means that if you’re married and both you and your spouse are eligible to contribute to a Roth IRA, you can potentially contribute a combined total of $14,000 to your respective Roth IRA accounts in a given tax year. Each spouse’s contributions are kept separate in their own Roth IRA accounts.

Can each spouse contribute $7000 to a Roth IRA?

Yes, each spouse can contribute up to $7,000 to their respective Roth IRA accounts, as long as they meet the eligibility criteria.

Can my spouse contribute to a Roth IRA if they don’t work?

Yes, your spouse can contribute to a Roth IRA even if they don’t have earned income, as long as you, as the working spouse, have enough earned income to cover both your contributions and your spouse’s contributions. This is known as a “spousal Roth IRA.” To take advantage of this option, you and your spouse must file your taxes jointly.

Be sure to consult with a tax professional or financial advisor to ensure compliance with the most current tax rules and regulations, as they can change over time.

Exceeding the Roth IRA income limit in 2024

If you do exceed the Roth IRA income limit it can result in financial consequences, including penalties and potential taxes on earnings. It’s crucial to stay informed about the current income limits, plan your contributions accordingly, and take corrective action if you accidentally exceed the limit. If you are interested in a comprehensive financial plan, schedule a free discovery call with one of our fee-only financial advisors today!

Best Financial Planner Washington DC

Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.

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District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.

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