Roth IRA Contribution Limits: How the ‘Phaseout’ Works

As a followup to yesterday’s entry about fixing Roth IRA contribution mistakes, I thought I’d write up some details regarding the phaseout rules. Once again, here are the critical income levels for Roth IRA contributions (all values listed refer to modified Adjusted Gross Income):

Married Filing Jointly: Roth IRA contibutions phase out between $150k-$160k
Single or Head of Household: Roth IRA contributions phase out between $95k-$110k
Married Filing Separately, Living Apart: Roth IRA contributions phase out between $95k-$110k
Married Filing Separately, Other: Roth IRA contributions phase out between $0-$10k

So as long as you’re below the values listed, you can make the full Roth IRA contribution ($4000 in 2006). If you’re above the listed range for your situation, then you’re out of luck. But what if you fall somewhere in between?

Here’s my understanding of the rules related to the Roth IRA contribution limits…

In short, if you fall within the phaseout range, then you need to reduce the contribution limit proportionally. So if you are married and filing jointly with a modified AGI of $155k, you can contribute ($4000 x 0.5) = $2000. This is because you are halfway (0.5) from the bottom to the top of the phaseout range.

Similarly, if you are are single and you make $100k, then you are 1/3 of the way across the phaseout range. This means that your contribution limit is reduced by 1/3, such that you can contribute $2666.67, right? Well, not quite… The other bit of information that you need to be aware of is that your limit gets rounded up to the nearest $10 increment. Thus, your limit in this case would be $2670.

Finally, if your modified AGI results in a reduction of your limit to somewhere above $0, but below $200, then you can contribute $200 to your Roth IRA.

As always, this is just my read of the rules, and I’m not a tax expert. If in doubt, ask an expert.