Recently, a friend called and wanted to know if she could contribute to a Roth IRA with a contribution date of 2018 to start her five-year clock. What she is referring to is the five-year holding period on a Roth IRA, generally known as the five-year rule. Basically, at age 59½ you are able to withdraw both contributions and earnings with no penalty, provided your Roth IRA has been open for at least five tax years. You can make a contribution for the tax year up until the tax filing deadline and start the clock (as of the tax year) if you have not finalized and submitted your taxes. That is, she could have started her five-year clock dated 2018 for the 2018 tax year, being filed this 2019 season, but unfortunately, she had already finalized and filed her taxes for 2018. Keep in mind, if you are under 59½, you can withdraw your contributions with no 10% penalty, but not your earnings. There are other five-year rules depending on whether you are a beneficiary, or made a Roth conversion. We’ll save those for another time.
Another problem this friend encountered is that she is a SHE, Successful High Earner. She is fortunate to have a good income, but unfortunately being single she earns too much to contribute to a Roth IRA. Her modified AGI (defined in Publication 590-A for Roth IRA) was well above $137,000. When thinking about a Roth IRA, keep in mind the following contribution limits from the IRS:
If your filing status is Married Filing Jointly or Qualifying Widow(er), and your modified AGI is less than $193,000, you can make a full Roth IRA contribution for the year. Between $193,000 but less than $203,000, you get to make a reduced contribution. However, once you earn $203,000 or more, your contribution amount is zero!
Married Filing Separately? Oh, dear…not good news. If you are married filing separately and you lived with your spouse at any time during the year, and you earned less than $10,000, you can contribute a reduced amount. If you earned $10,000 or more, your contribution is zero.
For Single, Head of Household, Married Filing Separately (and you did not live with your spouse at any time during the year), and your modified AGI is less than $122,000, you can make a full contribution. Between $122,000 but less than $137,000 you can contribute a reduced amount. If you earned $137,000 or more, your contribution is zero!
What are those contribution amounts? For 2019 your total contributions to all IRA types cannot exceed $6,000. If you are age 50 or older, you can contribute an extra $1,000 for a total of $7,000.