As part of ThinkAdvisor’s Special Report, 22 Days of Tax Planning Advice: 2015, throughout the month of March, we are partnering with our ALM Media sister service, Tax Facts Online, to take a deeper dive into certain tax planning issues in a convenient Q&A format.
1. How much may an individual contribute to a Roth IRA?
An eligible individual may contribute cash to a Roth IRA on his own behalf up to the lesser of the maximum annual contribution limit (equal to the “deductible amount” under IRC Section 219(b)(5)(A)) or 100 percent of compensation includable in his gross income for the taxable year. The amount that can be contributed, however, is reduced by any contributions made to traditional IRAs for the taxable year on his own behalf.
The maximum annual contribution limit is $5,500 in 2015. This amount is indexed for inflation. The maximum annual contribution limit is increased by $1,000 for individuals who have attained age 50 before the close of the tax year.
SEPs and SIMPLE IRAs may not be designated as Roth IRAs, and contributions to a SEP or SIMPLE IRA will not affect the amount that an individual can contribute to a Roth IRA. Qualified rollover contributions do not count toward the limit. Roth IRA contributions are not deductible and can be made even after the individual turns age 70½.
An individual may contribute cash to a Roth IRA for a non-working spouse for a taxable year up to the maximum deductible limit (disregarding active participant restrictions) permitted with respect to traditional IRAs for such non-working spouse reduced by any such contributions made to traditional IRAs for the taxable year on behalf of the non-working spouse. Thus, a married couple (both spouses under age 50) may be permitted a maximum contribution of up to $11,000 for 2015 ($5,500 for each spouse).
In 2015, the Roth IRA contribution limit is $0 for (1) individuals with AGI of $131,000 and above ($129,000 in 2014), (2) married couples filing a joint return with AGI of $193,000 and above ($191,000 in 2014), and (3) a married individual filing separately with AGI of $10,000 and above. Except for married individuals filing separately, the “applicable dollar amount” is indexed for inflation. The amount of the reduction is rounded to the next lowest multiple of $10. Unless the individual’s contribution limit is reduced to zero, the IRC permits a minimum contribution of $200.
2. Can a taxpayer whose income level exceeds the limitations for Roth IRA contributions maintain a Roth IRA?
Yes. Despite the fact that a taxpayer whose income level exceeds the Roth IRA contribution limits cannot contribute directly to a Roth IRA, he or she is permitted to maintain a Roth account. In 2015, the ability to make contributions to a Roth IRA begins to phase out for married taxpayers with income over $183,000 ($116,000 for single taxpayers). Roth contributions are completely blocked for married taxpayers who earn over $193,000 and single taxpayers who earn over $131,000.
While contributions cannot be made directly to the Roth if the taxpayer’s income exceeds the annual income threshold, for tax years beginning in 2010, the income limits that applied to prevent high-income taxpayers from making rollovers from traditional IRAs were eliminated.
Therefore, many high-income taxpayers may make contributions indirectly to a Roth account, via a series of rollovers from traditional IRAs. The taxpayer must first open a traditional IRA if the taxpayer does not already maintain such an account (in 2015, each taxpayer can contribute up to $5,500 to an IRA ($6,500 if the taxpayer is 50 or older). The taxpayer can then roll a portion of the IRA into a Roth account each year, though taxes must be paid on the amounts that are rolled over.