Can You Contribute to a Roth IRA?

By Beverly DeVeny
IRA Analyst
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Contributing to a Roth IRA is generally considered to be a good idea. But not everyone is eligible to make an annual contribution. We have seen several cases recently of individuals who contributed for many years until they discovered they were not eligible to make any Roth contributions. Here is what you need to know.

First, you must have earned income in order to make a Roth IRA contribution. That means you must perform some type service to have earned income. Passive sources of income generally do not count. As a result, Social Security and payments from any type of retirement plan are not earned income. Rental income is generally not earned income. Investment income and interest income also do not qualify. Disability income will not qualify.

Many people think that if they have after-tax income they can put it into a Roth IRA. This is not true. Gains on the sale of a home or from investments cannot be contributed to an IRA just because they are after-tax funds.

The second requirement for making a Roth IRA contribution is income based. If your income is too high, you cannot make a Roth IRA contribution. For 2018, the ability of someone to make a Roth contribution who is filing married/joint phases out between $189,000 – $199,000. For an individual filing as single the limits are $120,000 – $135,000. The tax code does not seem to like those individuals who are married and file separate, their phase-out range is $0- $10,000.

There is no age limit for making a Roth IRA contribution.

If you meet these two criteria, then you are eligible to contribute to a Roth IRA. The IRA/Roth IRA contribution limit is a combined one. You can contribute up to $5,500, in total, to your IRAs and Roth IRAs in 2018. You cannot contribute up to $5,500 to your IRA and also contribute up to $5,500 to your Roth IRA. Your individual total is $5,500. If you are age 50 or older during 2018, you can contribute an additional $1,000 to your IRA accounts for a total of $6,500 for the year. 

A question we get frequently is whether or not you can contribute to your Roth IRA if you are already making contributions to an employer plan. The answer to that question is yes, as long as you meet the income limits. This is true even if your employer plan is a SEP or a SIMPLE IRA.

What happens if you make an ineligible contribution? You have an excess contribution in your Roth IRA. If you catch the mistake before October 15th of the year after the year for which the contribution is made then you can recharacterize the Roth contribution to an IRA contribution. The other option is to remove the contribution as a return of an excess contribution. Any income attributable to the contribution must also be removed.

Excess contributions that are not timely removed are subject to a penalty of 6% for every year that they remain in the Roth IRA. They must be reported to IRS on Form 5329 which can be filed with your tax return or filed as a standalone return. When Form 5329 is not filed, the statute of limitations does not start to run on the 6% penalty. IRS would have the ability to assess the penalty back to the year of the contribution, plus interest, plus penalties.