Roth IRA Contribution Limits

As mentioned earlier, Roth individual retirement account (IRA) contribution limits mirror those for traditional IRAs. So, the maximum that can be contributed to a Roth IRA in 2008 is $5,000 ($4,000 in 2007), with an additional $1,000 contribution allowed for those age 50 and above in 2007 and 2008. Like nondeductible contributions to a traditional IRA, contributions to a Roth IRA are made on an after-tax basis.

However, if your adjusted gross income (AGI) is above a certain amount, your maximum contribution limit for the year is gradually reduced. For 2007, Roth IRA contributions are limited under the following circumstances:

The income limits for Roth IRA contributions are indexed for inflation and rounded to the nearest multiple of $1,000. In 2008, for example, the contribution limit to Roth IRAs is $159,000 for taxpayers filing a joint return, $101,000 for all other taxpayers (except married taxpayers filing separately), and $0 for married taxpayers filing separately. However, the inflation indexing does not affect the phase-out ranges under present law. The phase-out range remains $15,000 for single taxpayers and $10,000 for married taxpayers.

Did You Know? Under the Heroes Earned Retirement Opportunities (HERO) Act, enacted May 29, 2006, members of the armed forces serving in Iraq, Afghanistan and other combat-designated localities can count their tax-free combat pay as earned income for determining the contribution amount for traditional and Roth IRAs. Prior to this change, a military member whose earnings consisted only of tax-free combat pay was barred from contributing to either IRA. Under the HERO Act, an eligible taxpayer may make an additional contribution to his or her retirement savings plan that is attributable to the combat zone compensation within three years of enactment. A taxpayer may file an amended return within one year of making such additional contribution to claim a credit or refund resulting form the additional deduction. In addition, the HERO Act allows military personnel to retroactively make an IRA contribution for 2004 and 2005 if, taking combat pay into account, they qualify for making the contribution. These retroactive contributions can be made as late as May 28, 2009. In addition, retroactive contributions may qualify military personnel for tax refunds for 2004 and 2005. The contribution limits for taxpayers under 50 to either a traditional or Roth IRA were $3,000 for 2004, $4,000 for 2005, and $4,000 for 2006. For those taxpayers over 50, the contribution amounts increased to $3,500 for 2003, $4,500 for 2005 and $5,000 for 2006.

Figuring the contribution reduction. If your AGI is between the ranges provided above, you can only contribute a reduced amount for the year. If your AGI is above the limits listed above, you cannot contribute to a Roth IRA. However, you can still make nondeductible contributions to a traditional IRA if you want to.

Excess contributions. A 6 percent excise tax applies to excess contributions made to a Roth IRA. However, any contribution withdrawn on or before the due date for filing your tax return (generally April 15) is treated as an amount that is not contributed. So, you can simply avoid the excise tax by withdrawing the excess contribution in time.