Opening an Roth IRA is easy, but you have to meet certain requirements in order to eligible for a Roth IRA. For example, you must have earned income, meet specified income limits, contribution deadlines, and open your IRA through an approved IRA custodian, generally a financial institution such as a bank or brokerage firm, or through an authorized IRA custodian (many independent financial advisors meet this qualification). There are many Roth IRA rules to follow – so let’s take a look and see if you are qualified to open a Roth IRA.
Earned Income Requirements for Roth IRA Contributions
Earned income generally includes all income from your salary, wages, services provided, professional fees, tips, commissions, profit sharing, and bonuses. Forms of income that don’t qualify as earned income include interest, dividends, royalties, rental income, capital gains, disability, social security income, or income from annuities. The general rule is that if you worked to generate the income, it qualifies as earned income; income that you receive which doesn’t require work often doesn’t count as earned income.
There is an exception to this rule for military members. Many military members earn tax free combat pay while deployed. This income is not generally considered earned income because it is tax free. However, the HEROES Act allows military members to contribute to an IRA even if they have no earned income due to tax free pay.
Income Limits for Roth IRA Contributions
In addition to meeting the requirement of having earned income, you must qualify for the income limits. If you earn above a certain threshold, then you will not be eligible to contribute directly to a Roth IRA. However, you may be able to do a Roth IRA conversion, which is where you first contribute to a traditional or non-deductible IRA, then convert it to a Roth IRA. Here is more information about Roth IRA conversions.
Income limits are based on the Modified Adjusted Gross Income (MAGI), which is found on your IRS Form 1040. Roth IRA income limits are as follows (for 2014 tax year):
Single, head of household, or married filing separately:
- Full contribution with AGI below $114,000
- Income limit phase out begins at $114,000 and ends at $129,000
- No eligibility with income above $129,000
Married Filing Jointly:
- Full contribution with AGI below $181,000
- Income limit phase out begins at $181,000 and ends at$191,000
- No eligibility with income above $191,000
What is a phase out? That means the tax payer is only able to contribute a portion of the maximum contribution at the beginning of the phaseout, then nothing once they reach the income limit.
Contribution Limits and Deadlines
Contribution Limits. If you are under age 50, you can contribute$5,500 to your Roth IRA, and persons age 50 and over can make a catch-up contribution of an additional $1,000, for a total of $6,500. This is an annual limit and you cannot make up for lost time and make additional contributions if you didn’t make them in previous years.
Contribution deadlines. The contribution deadline for Roth IRAs is the same as the tax filing deadline, April 15th. You can contribute to a Roth IRA as soon as the calendar year changes, and you have until April 15th of the following year (or perhaps a day or two later if the tax deadline falls on a weekend or national holiday). You can not extend the IRA contribution deadline if you need to file a tax extension.
Open Roth IRA at an Approved Institution
The final element to qualifying for a Roth IRA is to open it at an approved financial institution. Basically, the IRS offers special tax benefits for opening a Roth IRA and they want to ensure they are properly coded, managed, and tracked for tax reasons. So you aren’t able to open it and keep it in your home. But the good news is that you can open a Roth IRA in many locations. For example, many brokerages, banks, credit unions, savings and loan associations, financial planners and most FDIC insured financial institutions qualify as an IRS-approved financial institution. The forms are easy to fill out and you can literally open an IRA in 10-15 minutes if you already have an account with the financial institution in place – if you don’t have an account you can add another 15 minutes to the process. Here are some top Roth IRA companies.
What to do if You Don’t Qualify for a Roth IRA
If you don’t qualify for a Roth IRA you may still be eligible to contribute to another IRA, then later convert it to a Roth IRA. For example, if you meet all of the Roth IRA qualifications with the exception of the income limits, then you may be able to contribute to a non-deductible IRA, which is a Traditional IRA that isn’t tax deductible. Then you can convert your Roth IRA and re-characterize your non-deductible IRA as a Roth IRA. Just keep in mind there may be some requirements, such as accounting for any gains.