Roth IRA: Rules and Limits 2017

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An IRA or Individual Retirement Account is a form of retirement plan that provides tax advantages for retirement savings.

A Roth IRA is best when:

  • A higher tax rate is expected in retirement because withdrawals in retirement are not taxed

Roth IRA Maximum Contribution 2017

The maximum amount that can be contributed to a Roth IRA is shared below.

The maximum eligible contribution amount to both a traditional IRA and a Roth IRA depends on your age.

Individuals under 50 are permitted to contribute annually a maximum of:

  • $5,500

Individuals over 50 may contribute annually a maximum of:

  • $6,500

However, the devil is in the details when it comes to eligibility rules for contributing to a Roth IRA. You are not permitted to contribute more than your taxable compensation unless your spouse has no earned income but would like to contribute to a spousal IRA. The spouse with earned income must have sufficient funds to cover the contribution and married couples must file jointly.

Couples under 50 are permitted to contribute annually a maximum of:

  • $11,000

Couples where both partners are over 50 may contribute annually a maximum of:

  • $13,000

Another caveat is that the maximum contribution amounts may be lower if your income exceeds certain threshold levels.

Roth IRA Maximum Income Limit 2017

The maximum permitted contribution amount to a Roth IRA depends on your adjusted gross income.

The maximum eligible contribution amount to both a traditional IRA and a Roth IRA depends on your adjusted gross income.

For individuals (single, head of household or married filing separately – if you did not live with your spouse in past year):

  • Adjusted gross income < $118,000 means $5,500 is the maximum contribution ($6,500 if over 50)
  • Adjusted gross income > $118,000 but < $132,999 means the permitted contribution is lower than the maximum
  • Adjusted gross income > $133,000 means you are not eligible to contribute

For married couples (filing jointly or qualifying widow/widower):

  • Adjusted gross income < $186,000 means $11,000 is the maximum contribution ($13,000 if over 50)
  • Adjusted gross income > $186,000 but < $195,999 means the permitted contribution is lower than the maximum
  • Adjusted gross income > $196,000 means you are not eligible to contribute

Roth IRA Rules For Distribution

The maximum amount which may be distributed annually depends on age and other circumstances shared below.

The big difference between a Traditional IRA and a Roth IRA is that contributions to a Roth IRA are made after-tax. This has implications when you withdraw money because it means money is withdrawn as follows:

  1. Money contributed to a Roth IRA is withdrawn first
  2. Money converted or rolled over from another account is withdrawn next
  3. Money earned on contribution investments comes out last for tax reasons

Penalties apply to withdrawals on Roth IRA accounts that are not at least 5 years old unless the person is:

  • Disabled
  • 59.5 years old
  • Purchasing a home and withdrawing up to $10,000
  • Dead and the estate or a beneficiary takes the distribution

A penalty charge of 10% may be applied for early distribution of funds, but can be avoided in certain situations (though taxes still apply) if the distribution is for:

  • Health insurance premiums while unemployed
  • Medical expenses greater than 10% of annual adjusted gross income
  • Qualified education expenses below a threshold level
  • Home purchase for first time buyers
  • Disability
  • Age > 59.5
  • Beneficiary or estate after death

Deadline To Contribute to Roth IRA

What is the last date you can contribute to your Roth IRA?

The IRS permits tax filers to contribute for the prior year up until the year’s tax filing deadline. It is permitted to invest any tax refunds into your Roth IRA if you file taxes early enough and received the refund prior to the tax filing deadline.

Roth IRA Penalties for Excessive Contribution

What happens if you contribute too much to your Roth IRA?

Penalties may be applied by the IRS if you contributed too much to your Roth IRA in any given year. If you spot the error before filing taxes or after filing taxes, the consequences differ as follows:

Excess Contribution Error Spotted Before Filing:

  • Withdraw excess contributions and earnings on those contributions; taxes must be paid on earnings but no penalties apply

Excess Contribution Error Spotted After Filing:

  • Withdraw excess contributions and earnings within 6 months and file amended tax return by Oct 15; taxes must be paid on earnings but no penalties apply

Alternatively, you could reduce the contribution the subsequent year by the excess amount contributed but the IRS charges a 6% penalty on the excess that was contributed for each year it remains in the Roth IRA account.

Roth IRA Tip: Be especially aware of how much you contribute to your Roth IRA if you have multiple accounts as it’s easy to lose sight of the total amount contributed and permitted.

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