Considering Setting Aside Funds for Retirement in a Roth IRA in 2025? Understand Your Eligibility Stipulations and Potential Actions if Excluded
Considering Setting Aside Funds for Retirement in a Roth IRA in 2025? Understand Your Eligibility Stipulations and Potential Actions if Excluded
Saving for retirement during your working years is crucial to avoid relying solely on Social Security when your career ends. You've got various methods to bolster your retirement fund.
One strategy is contributing to a traditional IRA, offering you an instant tax break on your contributions. Another path is funding a Roth IRA, devoid of an initial tax break, but providing numerous incentives.
With a Roth IRA, the profits from your investments are tax-exempt, and withdrawals are tax-exempt during retirement. This is particularly advantageous as it reduces one more financial concern at a time when funds might be scarce.
Roth IRAs also provide you with the privilege of avoiding required minimum distributions (RMDs). Evading RMDs allows your money to stay untouched for an extended period, maximizing the tax-exempt gains we previously discussed.
In 2025, the contribution limits for Roth IRAs remain the same as in 2024. You can contribute up to $7,000 if you're under 50, or up to $8,000 if you're 50 or older.
However, income limitations are vital to consider if you're contemplating funding a Roth IRA in 2025. Here's what you need to remember.
Roth IRA income thresholds are on the rise
Your eligibility to fund a Roth IRA hinges on your modified adjusted gross income, or MAGI. If you're single or a head of household, you can make a full Roth IRA contribution in 2025 if your MAGI is under $150,000. The contribuiton amount decreases between $150,000 and $165,000, and Roth IRA contributions are not an option beyond $165,000.
If you're a married couple filing a joint tax return, you can make a full Roth IRA contribution with a MAGI below $236,000. Roth IRA contributions reduce progressively between $236,000 and $246,000, and completely phase out when your MAGI exceeds $246,000.
If you're married filing a separate tax return, the Roth IRA contribution phase-out range remains between $0 and $10,000 as it is in 2024. With this tax-filing status, there's limited room to contribute to a Roth IRA.
What to do if you're not eligible for a Roth IRA in 2025
If your income disqualifies you from direct Roth IRA contributions in 2025, don't completely rule out the option. In such circumstances, you can contribute to a traditional IRA and convert it to a Roth IRA at a later date.
However, Roth IRA conversions can be complex, and the ideal time to execute them should be carefully considered to minimize the tax impact. If you convert a $7,000 IRA to a Roth in 2025, that $7,000 counts as income for tax purposes. In certain situations, it could have repercussions beyond the taxes you pay for the year.
For example, if you're older and nearing eligibility for Medicare, a Roth IRA conversion could boost your income high enough to subject you to a future surcharge known as an income-related monthly adjustment amount. This surcharge could subsequently make both Parts B and D more expensive for you.
For this reason, if you're considering a Roth IRA conversion – in 2025 or any other time – it's worth consulting a financial or tax advisor. They can guide you through your options, ensuring you make the conversion at the most opportune moment.
Contributing to a traditional IRA or a Roth IRA during your working years can significantly boost your retirement fund. If your income falls within the eligible range for Roth IRAs, funding one is beneficial as it allows tax-exempt withdrawals during retirement and avoids required minimum distributions.
However, if your income exceeds the Roth IRA eligibility threshold, you can still consider contributing to a traditional IRA and converting it to a Roth IRA at a later date, but this strategy requires careful consideration to minimize tax implications, especially if you're nearing eligibility for Medicare.