Annual contributions to a Roth IRA are subject to certain restrictions and should be made after getting IRA advice. The Internal Revenue Service sets limits on how much money you can contribute to a Roth IRA each year. Consider the Roth IRA limits when you're budgeting for contributions to other retirement accounts, such as a 401k, 403b or traditional IRA.

Because the contributions to a Roth IRA come out of post tax income, these funds are not subject to income tax once you've reached retirement age. The more you contribute to a Roth IRA, the more tax free funds you can enjoy when you retire. At the age of 59 1/2, you become eligible to take distributions from your Roth IRA without any tax penalties, as long as you've had the account for 5 years or more. You may also make an early withdrawal without a 10 percent tax penalty if you become disabled, are buying a first home or have sizable medical bills. [1]

Maximum Annual Limits

In the past, maximum annual contribution limits were set at $5,000 or your taxable income, whichever was less. As of 2012, you may be eligible to make a full contribution, a partial contribution or no contribution, depending on how much money you earn and your tax filing status. This modification allows individuals with a higher income to make partial contributions, depending on their modified Adjusted Gross Income. If your income exceeds a certain level, you are not eligible to make contributions during that tax year. [1]

If you are married and filing your taxes jointly, you may make a full contribution of up to $5,000 during the tax year if you earn $173,000 or less. If you earn more than $173,000, you may make a partial contribution, which is calculated based on your modified AGI. If you and your spouse earn $183,000 or more, you may not make a contribution to a Roth IRA.

If you are filing as a single taxpayer, as the head of the household or as a married person filing separately, you may make the full contribution to your Roth IRA if your modified AGI is $110,000 or less. If your modified AGI is over $110,000, you may make a partial contribution. If your modified AGI is $125,000 or more, you are not eligible to contribute. If you are married and filing separately and you lived with your spouse at any time during the year, you may make a full contribution if your modified AGI is $10,000 or less.

At the age of 50, you may contribute an additional $1,000 each year if you meet the necessary income requirements, for a total maximum limit of $6,000. This increase allows older adults to catch up on their retirement goals. If you are getting a late start in your retirement planning, catch up contributions to a Roth IRA will accelerate your progress.

Excess Contributions

Contributing more than the annual limit to a Roth IRA will result in a tax penalty. You must pay a 6 percent excise tax on any amount you contribute that exceeds your maximum limit. This penalty does not apply to funds that are rolled over from a 401k or other retirement plan, or that are converted from a traditional Roth IRA, as long as the required conditions are met.

If you contribute too much money in a given year, you may apply that contribution to a later year if your contribution for that later year does not exceed the annual maximum. [1] Learning about the Roth IRA limits will help you make the most of this valuable investment option. Talk with an investment advisor about how to adjust your contributions to fit your retirement goals.

http://www.irs.gov/publications/p590/ch02.html#en_US_2011_publink1000231024 01/20/2012