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Am I eligible for a Roth IRA?

December 13, 2022
|
Insights
updated on
April 15, 2024

Key Takeaways

  • A Roth IRA is a tax-free retirement account. While investors must pay taxes on their non-qualified investments, the withdrawals are completely tax-free.
  • Calculating your modified adjusted gross income (MAGI) can be a complicated process, but we outline three steps for you to do it.
  • While conventional IRAs are popular, many savvy investors are choosing to allocate a portion of their retirement funds to a self-directed Roth IRA, such as with Alto.

What is a Roth IRA?

A Roth IRA is a tax-free retirement account. While investors must pay taxes on their non-qualified investments when they sell assets, the main benefit of a Roth IRA is that withdrawals are completely tax-free once an investor takes a distribution, assuming their account has been open for at least five years and that they’ve waited until age 59-½ to make a withdrawal.

Roth IRAs are a powerful investment tool due to their tax-free nature. Though the contribution limits and Roth IRA income limits set by the Internal Revenue Service (IRS) are relatively straightforward, calculating your modified adjusted gross income (MAGI) can be a complicated process.

This guide includes a three-step process that you can use to calculate your MAGI with other information to consider if you’re married and filing jointly.

What are the benefits to investing with a Roth IRA?

There are many benefits to investing with a Roth IRA:

  • No required minimum distributions (RMDs)
  • Tax-free distributions for the heirs who inherit your Roth IRA
  • Access to funds if you need to withdraw early (Though not recommended, you can withdraw from your contributions penalty-free at any time, but not from your gains.)

Read more: Traditional vs. Roth IRAs: Which Is Better?

Am I eligible for a Roth IRA?

To be eligible for a Roth IRA, you must have:

  1. Earned income
  2. A MAGI below Roth IRA income limits, as determined by the IRS

We’ll share details on how to calculate your MAGI in a bit. But first, you can use the chart below to determine your Roth IRA eligibility for the 2022 and 2023 tax years.

To contribute to a Roth IRA as a single person filing your taxes, your MAGI must be under $153,000 for tax year 2023 and $161,000 in 2024. If you’re married and filing jointly, your MAGI must be under $228,000 for the 2023 tax year and $240,000 for 2024.

For the 2024 tax year, the IRS increased the IRA contribution limit from $6,500 to $7,000 ($8,000 for participants 50 and older).

Read more: What the 2023 IRA Contribution Limit Increase Means for You

How do I calculate my MAGI for Roth IRA eligibility?

Now that you know the Roth IRA income limits, you’re probably wondering how to calculate your modified adjusted gross income, or MAGI, especially if you think you might be teetering on the limit.

MAGI is an IRS calculation used to determine eligibility for not only Roth IRA contributions but also certain tax deductions and credits.

To calculate your MAGI, first, you need to calculate your gross income and your adjusted gross income (AGI). Generally, a person’s MAGI will be close in value to their AGI. However, the exact relationship between the two numbers will depend on a person’s unique circumstances and the deductions they’re eligible for.

Step 1: Calculate your gross income.

To calculate your gross income, add all money you earned during a particular year, without tax deductions. Gross income includes:

  • Wages, tips, and salary
  • Business income
  • Dividends
  • Rental and royalty income
  • Unemployment
  • Capital gains
  • Farm income
  • Alimony payments
  • Interest
  • Retirement income

Step 2: Calculate your adjusted gross income (AGI).

Now that you’ve added up all the money you earned during a particular year, to calculate your AGI, take the total income you brought in and subtract your allowable deductions. Common deductions include:

  • Student loan interest
  • Health savings account contributions
  • One-half of self-employment tax
  • Tuition and fees
  • Educator expenses
  • IRA and self-employed retirement plan contributions
  • Self-employed health insurance payments
  • Early withdrawal of savings penalties
  • Certain business expenses of performing artists, reservists, and fee-basis government officials

Step 3: Add certain deductions back to your AGI to calculate your MAGI.

Now that you have your AGI, you need to add back certain deductions to calculate your MAGI. While many people will have an identical AGI and MAGI, the IRS separates the two because certain credits and deductions are phased out as your income increases.

Add these deductions back to your AGI to calculate your MAGI:

  • Student loan interest
  • One-half of self-employment tax
  • Tuition and fees
  • Qualified tuition expenses
  • Passive income or losses
  • IRA contributions
  • Non-taxable Social Security payments
  • The exclusion for income from U.S. savings bonds
  • Foreign income and foreign housing exclusions
  • The exclusion for adoption expenses under Section 137 of the Internal Revenue Code
  • Rental losses
  • Losses from a publicly traded partnership

So, for example, if you were filing as single for the 2022 tax year with the following conditions, you would qualify to contribute to a Roth IRA since your MAGI would fall within the limit ($129,000).

AGI: $120,000
Foreign income: $2,000
Self-employment taxes: $1,500
Passive income or losses: $4,000
= $126,750

If you want an estimate, you can use a MAGI calculator. However, it may also be smart to consult a financial or tax advisor.

How do I calculate my MAGI if I’m married and filing jointly?

If you’re married and filing jointly, the IRS essentially views you and your spouse as one entity for tax purposes, meaning your gross income and deductions are combined. So, for example, if you had a gross income of $85,000 and your spouse had a gross income of $100,000 during the 2022 tax year, you’d combine the gross income ($185,000) and then start with step 2.

What if my spouse or I got a raise or bonus during the year?

If you or your spouse received a raise or a bonus at work, you must include it while calculating your gross income. If this pushes your combined MAGI beyond the Roth IRA income limit, you can still contribute to a Roth IRA via a backdoor Roth IRA conversion.

Backdoor Roth conversions involve paying a one-time tax on the amount to be converted and are popular among wealthy investors, who will often complete a series of conversions over several years to avoid being pushed into a higher tax bracket.

Read more: What Is a Backdoor Roth IRA?

The bottom line

If your MAGI falls below the Roth IRA income limits, congratulations! You qualify to contribute to a Roth IRA.

This powerful tool can help you invest for the future while making use of unique tax advantages. While conventional IRAs are a popular choice, many savvy investors are choosing to allocate a portion of their retirement funds to a self-directed Roth IRA, which allows participants to invest in a wide variety of alternative assets, including startups, real estate, fine art, farmland, and even cryptocurrency.

Open an account today to get started.

Invest in alternative assets using tax-advantaged retirement funds.

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