What Happens to My Roth IRA When My Income Increases?

by Sophia Bera on March 20, 2019

I frequently recommend Roth IRAs to my clients as part of their retirement savings strategy. Because you contribute after-tax income, millennials who are still establishing their careers (and therefore are in a lower tax bracket) can lock in a lower tax rate on contributions now, and then pay no taxes when withdrawing money in retirement — even if you’re in a higher tax bracket.

You can always withdraw your contributions from a Roth IRA at any time — tax free and penalty free!

Many people don’t know this! Roth IRAs can offer you some flexibility. That means you could use a Roth IRA for college savings, buying a house, or even as a backup emergency fund.

One thing to keep in mind is that Roth IRAs have income limits. That means you may be one promotion or new job away from no longer being allowed to contribute. Getting married can change your eligibility, too, because doing so rapidly increases your household income. For 2019, the income limits are $137,000 if you’re single and $203,000 for married couples. (If your income is close to that amount, you might be able to make a partial contribution.) If you opened a Roth IRA earlier in your career when you earned less, you may not be able to add to it now.

If that happens to you, what happens to all the money in your Roth IRA? Is it still yours? Will you ever be able to contribute again in the future? Don’t worry — you have a lot of options.

The Money Your Contribute to a Roth IRA Is Yours to Keep

Whatever happens to your income or your career, your Roth IRA is your account. The money you deposited there is still your money. No matter how much you’re earning in the future, the money you already have in the account will remain invested with the goal is to grow into a nest egg for your future self.

That’s why it’s so important to start saving early in your career, when you have a few years to accumulate a nice balance in your Roth IRA before you get a few substantial raises (by the way, don’t give up raises just to remain Roth-eligible — get the income you deserve!). Until you get to that point, don’t miss a great opportunity to have access to tax-free money in the future.

Who can contribute to a Roth IRA? (New for 2019!)

Roth income limits changed between 2018 and 2019. If your household falls within a small income window, you may be able to start contributing to your Roth IRA again. You can also contribute a little more than you could in the past.

Single and head of household limits

If you earned less than $122,000 in the previous tax year, you can contribute up to $6,000 to your Roth IRA annually. (If you’re 50 or older, that jumps to $7,000.)

If you earn between $122,000 and $136,999, you can still contribute to a Roth IRA, but the amount you can contribute is reduced on a sliding scale depending on how much you make.

Once you hit $137,000, you are no longer eligible to contribute to a Roth IRA.

These limits also apply to people who are married but filing separately, provided you did not live with your spouse during the tax year in question.

Married filing jointly

If you and your spouse earn a combined income of less than $193,000 per year, you each can contribute up to $6,000 per year to your Roth IRAs. (Again, if you’re over 50, that jumps to $7,000 each.)

For couples filing jointly, the reduced contribution window is smaller: between $193,000 and $202,999. Once you reach an annual income of $203,000, you household can no longer contribute to your Roth IRAs.

Married filing separately

If you lived with your spouse during the tax year in question but still file separately, you can only contribute to a Roth IRA if you earn less than $10,000 per year, and only on a reduced contribution scale.

If I’m Close to the Income Limits, What Can I Do?

If your income fluctuates over time, you may be able to contribute some years but not others. For example, let’s say you exceeded the income limit in 2017, but dropped to part-time work in 2018 so you could go to grad school and no longer exceed the limit. That means you can contribute once again in 2018. If your income is close to the Roth IRA contribution limits, you may be able to keep contributing by making some smart money moves.

There are a few reasons financial planners often suggest paying into a 401(k) and a Roth IRA. One of those reasons is that when you contribute pre-tax income to your 401(k), you reduce your take-home income — which could take you below Roth IRA limits.

The Magical Backdoor Roth for High Income Earners

If you’re still beyond Roth IRA income limits, there’s another way to indirectly contribute to a Roth: The backdoor Roth IRA. To do this, you open a traditional IRA, fund it with $6,000, and then convert it to a Roth IRA. However, if you have other Traditional IRA money it is generally not advantageous to do this. I only recommend this for people who have the majority of their retirement assets in 401(k) plans and very little IRA assets. Make sure you have a CPA on your team who knows how to execute it properly.

Can I Still Contribute to a Roth IRA for 2018?

You can contribute to a Roth IRA for the prior year until Tax Day. That means if you still haven’t made a contribution for 2018, you have until April 15 of this year to do so.

Remember, the money in your Roth IRA will always be yours. If you contribute to your Roth for as long as you can, then when the time comes to use it, you’ll have tax-free money waiting for you.