What Factors Contribute to Calculating Roth IRA Contributions

A Roth IRA is a type of individual retirement account with tax advantages. Its primary benefit is that your earnings and contributions can grow tax-free and can also be withdrawn without paying any tax after a particular age. Roth IRAs are almost similar to traditional IRAs, but there is a big distinction in how they are being taxed. 

In this article, you will find what factors contribute to calculating Roth IRA contributions.

Modified Adjusted Gross Income (MAGI)

Modified adjusted gross income is your adjusted gross income after taking into account certain allowable deductions and tax penalties. How much you can contribute to your Roth IRA significantly depends on your MAGI.

To calculate your modified adjusted gross income, you must follow these points:

Step 1: Determine your gross income for the year: Your gross income includes everything you have earned during the whole year, such as:

• Business income 
• Alimony
• Dividends
• Interests
• Capital gains 
• Rental income 
• Tips
• Wages
• Retirement income 
• Farm income

Step 2: Calculate your adjusted gross income: Your AGI is equal to your gross income minus your certain tax-deductible expenses, such as:

• Self-employment taxes
• Business expenses 
• Health insurance premiums
• Penalties for early withdrawals from your savings

Step 3: Add back certain deductions to calculate your MAGI: Now take your AGI and add back the following:

• Half of self-employment tax
• Deductions you took for IRA contributions 
• Taxable social security payments
• Excluded foreign income
• Passive income or loss
• Rental loses

Age

Your age is one of the most crucial factors that significantly contribute to calculating your Roth IRA contribution. You can use any online Roth IRA calculator to get an estimate of your contribution. 

If you are:

• Under Age 50:  Your maximum contribution limit is $7000.

• Older than Age 50: Your maximum contribution limit is $8000. 

Tax Filing Status

Your filing status (single, married, etc.) affects the income threshold, which determines wheter you are eligible for a Roth IRA contribution. For example, the modified adjusted gross income limits for full contributions are different for married couples filing jointly versus single filers. 

Income

Income is one of the most crucial aspects to consider when calculating Roth IRA contributions. However, you can not include fixed income, as only earned income can contribute to a Roth IRA.

To calculate your Roth IRA contribution, you must have compensation like wages, fees, salary, bonuses, professional fees, and tips. Moreover, your modified adjusted gross income must be less than:

• $160,000 if you are married and filing jointly. 
• $10,000 if you are married but filing separately and live with your spouse during the year. 
• $110,000 if you are single, head of household, or married and filing separately, but you did not live with your spouse during the year.

Other Factors

In addition to the above, there are also some other factors that contribute to calculating Roth IRA contributions, such as:

• Your eligibility and contribution limits are significantly affected if you have participated in a retirement plan at work. 
• If you are contributing to other IRAs, such as traditional IRA, it can significantly affect your Roth IRA contribution.