How to Calculate Roth Vs. IRA Contributions

Traditional IRAs and Roth IRAs are two retirement accounts that encourage saving by giving you tax breaks. Both accounts are tax-sheltered, which means the money grows tax-free while it is in the account. Contributions to a traditional IRA are generally tax-deductible, but the money is taxed when you withdraw it. Contributions to your Roth IRA are not tax-deductible, but you can withdraw them tax-free at retirement. Your contribution limit for traditional IRAs and Roth IRAs are cumulative, so if you contribute $1,000 to a traditional IRA the amount you can contribute to a Roth IRA decreases by $1,000.

Difficulty: Moderately Easy

Instructions

1. Determine the annual contribution limit based on your age for all types of IRAs. For 2009, if you are under age 50 you can contribute $5,000 and if you are 50 or older you can contribute $6,000.

2. Determine whether the annual contribution limit is smaller than your taxable income. If the annual contribution is smaller, that is your limit for both traditional IRAs and Roth IRAs. If your taxable income is less than the annual contribution limit, the amount of taxable income is your contribution limit.

3. Determine if you are eligible to contribute to a Roth IRA based on the annual income limits. For 2009, if you are single and have a modified adjusted gross income (MAGI) less than $105,000 or are married filing jointly and have a MAGI than $166,000, you can contribute up to the annual limit. If you are single and have a MAGI between $105,000 and $120,000, married filing separately and have a MAGI less than $10,000 or married filing jointly and have a MAGI between $166,000 and $176,000, you can make a reduced contribution (see step 4).

4. Determine your reduced contribution to the Roth IRA by using the following formula where C is your contribution limit from step 1, H is the high limit of the reduced contribution range, L is the low limit of the reduced contribution range and MAGI is your modified adjusted gross income:
   
   Reduced contribution limit = C * (H - MAGI) / (H - L)
   
   For example, if you were 35 and had a MAGI of $111,000, your maximum Roth IRA contribution would be $3,000.

5. Determine how much you can contribute to a traditional IRA if you make your maximum Roth contribution by subtracting your Roth contribution from your total annual contribution limit found in step 1. For example, if you contributed $2,000 to your Roth IRA and your limit was $5,000, you would be allowed to contribute $3,000 to your traditional IRA. You can choose to contribute your entire contribution to your traditional IRA even if you are eligible to have a Roth IRA.

Tips & Warnings

• You will not be able to withdraw the money without paying a penalty until age 59 1/2, so make sure you will not need the money before investing it.
• If you are age 70 1/2 or older, you cannot contribute to a traditional IRA.

References

• IRS Traditional IRA Rules
• IRS Roth IRA Rules
• Wells Fargo Roth IRA Information