Roth IRA Changes You Need To Know
Roth IRA Contribution Ranges
Like a traditional tax-deductible IRA, the maximum Roth IRA contribution for 2022 is $6,000, and the catch-up contribution for those 50 and older is $1,000, for a total maximum contribution of $7,000 for those age 50 or older.
Keep in mind that these maximums assume you have earned income at or above these levels. If you earn less, your maximum is lower. For example, if you earn $1,000 in 2022, the maximum you can contribute is not $6,000 but $1,000.
For a discussion of what is earned income (“compensation”) for purposes of an IRA, see Table 1-1 of IRS Publication 590-A. Examples: Wages, salaries, commissions, self-employment income. What’s not compensation for IRA purposes? Examples: Interest and dividend income, pension or annuity income.
For the rest of this discussion, let’s assume you earn substantially more.
Who Can Contribute The Full Amount? Who Can Contribute Less? Who Can’t Contribute At All?
Taxpayers making more than a certain amount are not eligible to make any contributions to a Roth. In contrast, there is no income restriction for traditional IRAs. That doesn’t close the door to Roth IRAs for high earners, however, since it is possible to convert traditional IRAs to Roths. Conversions are not income-restricted. A conversion involves a withdrawal from a traditional IRA, which generally, but not always, triggers income taxes. (If you have questions about conversions, email me at the address below.)
What’s A Phase-Out?
Think of a phase-out as a door that’s either shut all the way or partly open so you can squeeze through a bit, but not fully. Phase-outs are a way to keep higher earners out of being able to contribute to a Roth.
Phase-outs have to do with filing status and income.
First, filing status . . .
Filing status can be single, head of household, married filing jointly, married filing separately and qualifying widow(er), which are all terms defined in the instructions for IRS Publication 1040.
Second, income . . .
When we’re talking “income,” we’re dealing with “modified adjusted gross income” (MAGI), which is a downward adjustment to your gross income. You take your gross income and subtract certain adjustments to arrive at your adjusted income (AGI) first. (The definition of AGI is gross income minus adjustments, such as educator expenses and, importantly, contributions to your retirement accounts.)
Then, subtract additional items (such as student loan interest deductions) to arrive at your MAGI. You can see an example of a MAGI worksheet for traditional IRAs at IRS.gov.
Now, let’s put the two together.
How Phase-Outs Work
Here are some examples; for more, go to the IRS’ Roth Contribution table for 2022.
If you file your return as a single filer (or head of household):
- You can contribute up to the limit if your MAGI is less than $129,000 in 2022, which is up from $125,000 in 2021. Again, the limit is either $6,000 if you are under 50 or $7,000 if you are 50 or older — assuming you did not max out due to earning less than $6,000 (or $7,000).
- You can contribute a reduced amount if your MAGI for 2022 is $129,000 or more but less than $144,000 (up from the range of $125,000 to $140,000 for 2021). How much is the reduced amount? The best way to figure that out is to use IRS Worksheet 2-2, “Determining Your Reduced Roth IRA Contribution Limit,” in Publication 590-A. But first, use Table 2-1, “Effect of Modified AGI on Roth IRA Contribution,” to make sure you are indeed in a reduced category.
- You can’t contribute at all if your MAGI is $144,000 or more (up from $140,000 in 2021).
For married couples filing jointly:
- You can contribute up to the limit if your 2022 MAGI is less than $204,000, up from $198,000 in 2021.
- You can contribute a reduced amount for 2022 if your MAGI is from $204,000 to less than $214,000, up from the range of $198,000 to $208,000 for 2021.
- You can’t contribute at all if your MAGI is $214,000 or more (up from $208,000 for 2021).
If you are married and filing separately, and you lived with your spouse at any time during the year, you can contribute a reduced amount if your MAGI is less than $10,000, and nothing if at $10,000 or more.
Tax-Deferred IRA Limits For 2022
Roth contributions are not deductible for anyone, no matter the income level. If you are interested in traditional IRA 2022 limits, see my Forbes.com post on changes for traditional IRAs in 2022. Phase-out ranges for traditional IRAs have to do with deducting contributions. For a Roth IRA, however, phase-out ranges work differently than traditional IRAs; for Roths, the question is not deductibility but eligibility.
Roth or Traditional IRA?
If you qualify for a Roth, should you choose a Roth over a traditional IRA? If you ask me, hands down, in just about every case I can think of, the Roth is the way to go. The big difference between the two is taxes. Given the option of a tax-free investment (Roth) versus a tax-deferred investment (traditional IRA), even when the contribution is tax-deductible, the tax-free Roth wins. (If you want to discuss my logic, let me know by email.)
Seek Advice Before Taking Action
Keep in mind that while these are the guidelines for 2022, before you take any action, consult with your tax adviser about your individual situation and the best way for you to proceed.
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