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FALLING WITHIN THE PHASEOUT, PART 1 – DETERMINING YOUR REDUCED ROTH IRA CONTRIBUTION LIMIT

By Andy Ives, CFP®, AIF®
IRA Analyst

When it comes to contributing directly to a Roth IRA, an individual must have modified adjusted gross income below a certain level. This income level cutoff is not a “cliff,” meaning if you go one dollar over the level, you do not immediately become ineligible for a Roth IRA. There is a phaseout range where the amount of the direct Roth IRA contribution is gradually decreased. For 2021, the Roth phaseout limits for contributions are $198,000 – $208,000 for those married/filing joint, and $125,000 – $140,000 for single filers. (In 2020, these numbers were $196,000 – $206,000 and $124,000 – $139,000, respectively.)

What if, after all the annual numbers are tallied, your income falls within one of these phaseout ranges? How do calculate how much you are allowed to contribute to a Roth IRA? The 2020 version of IRS Publication 590-A provides a table to help calculate that number. Grab a pen and paper, number from 1 to 11, and simply fill in the answers to the following:

Line 1. Enter your modified AGI for Roth IRA purposes.

Line 2. Enter:

  • $196,000 if filing a joint return or qualifying widow(er),
  • $0 if married filing a separate return and you lived with your spouse at any time in 2020, or
  • $124,000 for all others (i.e., single or head of household).

Line 3. Subtract line 2 from line 1.

Line 4. Enter:

  • $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or
  • $15,000 for all others (i.e., single or head of household).

Line 5. Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000.

Line 6. Enter the lesser of:

  • $6,000 ($7,000 if you are age 50 or older), or
  • Your taxable compensation

Line 7. Multiply line 5 by line 6.

Line 8. Subtract line 7 from line 6. Round the result up to the nearest $10. If the result is less than $200, enter $200.

Line 9. Enter any contributions for the year to all other traditional and Roth IRAs.

Line 10. Subtract line 9 from line 6.

Line 11. Enter the lesser of line 8 or line 10. This is your reduced Roth IRA contribution limit.

As with all tax issues and questions, please seek out a qualified tax professional for additional guidance.

https://www.irahelp.com/slottreport/falling-within-phaseout-part-1-determining-your-reduced-roth-ira-contribution-limit

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