Three Roth IRA Rules to Know During Tax Season

Tax season is the perfect time to review your Roth IRA contribution strategy. While Roth IRAs offer incredible tax advantages, they come with specific rules that can trip up even savvy investors. After all, the humble Roth IRA is one of your most powerful retirement savings tools—when used correctly.

You have until the April tax return deadline to set up and fund an IRA for the prior tax year. This means you have until April 15, 2025 to open and contribute to a Roth for 2024. We're also in the window where you can fund your 2025 IRA at the same time. Additional contributions for 2025 can be made until April 15, 2026, and so on. Keep in mind, filing for an extension to submit your return does not extend the deadline for IRA contributions.

Here key contribution guidelines to know about Roth IRAs right now, so you can maximize your retirement savings and avoid potential penalties.

Rule 1: Earned income

The most fundamental rule for Roth IRA contributions is simple: You can only contribute money you've actually earned. This means your contributions must come from:

• Wages from a job

• Salary

• Tips

• Commissions

• Self-employment income

• Bonuses

• Alimony

Important nuances to remember:

• Investment income, Social Security benefits, and pension payments do not count as earned income

• If you're a stay-at-home spouse, you can still contribute based on your working spouse's earned income

• For students or part-time workers, your contribution is limited to your actual earned income for the year

Rule 2: Annual contribution limits

The IRS sets specific limits on how much you can contribute to a Roth IRA each year. For 2024, these limits are:

• Under 50 years old: $7,000 maximum annual contribution

• 50 and older: $8,000 (includes a $1,000 catch-up contribution)

These limits are aggregate across all your IRAs. So if you have multiple Roth or traditional IRA accounts, the total contributions cannot exceed the annual limit.

Attempting to contribute more than the annual limit will result in a 6% penalty tax on the excess amount unless promptly removed. If you exceed the Roth IRA contribution limits, you have until the tax filing deadline, plus extensions, to withdraw the excess contributions and any income they earned.

Rule 3: You can't contribute more than you earn

This rule is a direct extension of the earned income requirement. Your Roth IRA contribution cannot exceed your total earned income for the year. For example:

• If you earned $5,000 in part-time work, your maximum Roth IRA contribution is $5,000

• If you only earned $3,000, you can only contribute up to $3,000

• If you earned $0, you cannot make any Roth IRA contributions

Pro tips for Roth IRA contributions

As a rule of thumb, keep detailed records of your earned income. I know I rely on automated contributions to stay within limits, as well as make sure I'm maxing out my fund.

Remember that contribution limits can change annually, so stay informed. Tax season is an excellent time to review your Roth IRA strategy. For me, this means making contributions as early in the calendar year as I can. I highly recommend getting ahead by maxing out 2025 as soon as you can, and then contributing larger lump sum right at the start of 2026. At the end of the day, compound interest is the name of the game, and early investing means more time for compounding to work.

View the full article