Opening a 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, contribute prior to the contribution deadline, and open your IRA through an approved IRA custodian. This is generally a financial institution such as a bank or brokerage firm, or through an authorized IRA custodian (many independent financial advisors meet this qualification).
It sounds like there are many Roth IRA rules to follow, but they are all pretty easy to do. 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 and other retirement accounts, 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. This is called a Backdoor Roth IRA because you are contributing to a Roth IRA through a roundabout method.
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 2020 tax year):
Single, head of household, or married filing separately:
- Full contribution with AGI below $124,000
- Income limit phase-out begins at $124,000 and ends at $139,000
- No eligibility with income above $139,000
Married Filing Jointly:
- Full contribution with AGI below $196,000
- Income limit phase-out begins at $196,000 and ends at $206,000
- No eligibility with income above $206,000
What is the phase-out? That means the taxpayer 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.
The following table shows a more graphical representation of Roth IRA income qualifications:
|2020 Roth IRA Income Limits|
If Your Filing Status Is...
|And Your Modified AGI Is...||Then You Can Contribute...|
|Married Filing Jointly or Qualifying Widow(er)||$196,000 or less||up to the limit|
|more than $196,000 but less than $206,000||a reduced amount|
|$206,000 or more||Zero.|
|Married Filing Separately and You Lived with Your Spouse at Any Time During the Year||less than $10,000||a reduced amount|
|$10,000 or more||Zero.|
|Single, Head of Household, or Married Filing Separately and You Did Not Live with Your Spouse at Any Time During the Year||$124,000 or less||no deduction.|
|more than $124,000 but less than $139,000||a partial deduction.|
|$139,000 or more||Zero.|
Contribution Limits and Deadlines
Roth IRAs also have rules regarding the amount you can contribute each year, and when you must make the contribution in order to count for the tax year.
If you are under age 50, you can contribute$6,000 to your Roth IRA in 2020. Persons age 50 and over can make a catch-up contribution of an additional $1,000, for a total of $7,000. 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.
It’s important to note that the $6,000 contribution limit applies to both Roth and Traditional IRAs. You can contribute to both, but only up to the annual contribution limit. So if the contribution limit is $6,000, you can split this in any increment adding up to $6,000. So you could do $6,000 in one and none in another, $3,000 in each, or any other combination that does not exceed the annual limit.
The following table shows the IRA contribution limits for each year since 2002.
|Tax Year||Contribution Limit |
Age 49 & Below
|Catch-up Contribution |
Limit Age 50 & Above
Age 50 & Above
|2019 - 2020||$6,000||$1,000||$7,000|
|2013 - 2018||$5,500||$1,000||$6,500|
|2008 - 2012||$5,000||$1,000||$6,000|
|2006 - 2007||$4,000||$1,000||$5,000|
|2002 - 2004||$3,000||$500||$3,500|
The contribution deadline for Roth IRAs is the same as the tax filing deadline, which is April 15th in most years. 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.
It would be worth consulting with a tax professional or fee-only investment advisor for more information on how to do this while minimizing taxes and avoiding potential penalties.