Do Roth IRA income limits exclude capital gains or unearned income?


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Dear Tax Talk,
When calculating Roth IRA income limits for qualification purposes, are capital gains included to determine modified adjusted gross income, or can they be backed out? To be eligible to contribute to a Roth IRA, you must have earned income, so to me that is all that should be used to determine income limits, not unearned or capital gain income.

Please advise. Thanks.
— Steve

Dear Steve,
Yes, capital gains are included in the modified adjusted gross income, or MAGI, calculation for purposes of determining whether you can contribute to a Roth IRA.

IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), has Worksheet 2-1, which goes through the entire calculation step by step. By starting the calculation with your adjusted gross income (shown on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37), you will see that it includes income such as interest, dividends, IRA distributions, taxable Social Security income and so on.

To be eligible to contribute to a Roth IRA, your MAGI must be:

  • Less than $191,000 for married filing jointly, or qualifying widow(er).
  • Less than $129,000 for single, head of household or if you are married filing separately and did not live with your spouse at any time during the year.
  • Less than $10,000 for married filing separately if you lived with your spouse at any time during the year.

You are correct that you must have compensation, which includes not only wages, salaries and income received for providing personal services, but also self-employment income, alimony, separate maintenance payments, nontaxable combat pay and military differential pay. Your contributions are limited to the lesser of your compensation or $5,500 ($6,500 if you are age 50 or older).

While you cannot deduct the contributions made to a Roth IRA, there are many reasons to contribute to one. All qualified distributions are tax-free. Additionally, unlike a traditional IRA, you can continue to make contributions after you reach age 70 1/2 and you do not have to take required minimum distributions.

Thanks for the great question and all the best to you.

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