3.1 Roth IRA Eligibility, MAGI Phaseouts, and Contribution Rules

Statutory Foundation and Core Principles (IRC Section 408A)

The Roth IRA was introduced by the Taxpayer Relief Act of 1997 and codified under Internal Revenue Code (IRC) Section 408A. Unlike the Traditional IRA established under IRC Section 408, where the tax benefit is front-loaded through potential income tax deductions, the Roth IRA operates on a back-loaded tax advantage model. Contributions are made strictly with after-tax dollars; there is no immediate federal income tax deduction. In exchange, all earnings accumulated within the account compound completely tax-sheltered, and qualified distributions of both principal contributions and investment earnings are distributed completely free of federal income tax.

A fundamental distinction tested on the CISP examination is the absence of an upper age limit for making regular annual contributions. Prior to the enactment of the SECURE Act of 2019, Traditional IRA owners were statutorily prohibited from making regular contributions beginning in the year they attained age 70½. In sharp contrast, IRC Section 408A has never imposed an age ceiling on Roth IRA contributions. As long as an individual has eligible earned compensation, they may establish and fund a Roth IRA at any age, whether they are 16 or 96 years old.

Compensation Requirements and Eligible Earned Income

To be eligible to make a regular annual contribution to a Roth IRA, an individual must receive taxable earned compensation during the applicable tax year, as defined under IRC Section 219(f)(1). The contribution cannot exceed the individual's eligible compensation for that year.

Eligible compensation includes:

• W-2 Wages and Salaries: Gross wages, tips, bonuses, and professional service commissions.
• Net Self-Employment Earnings: Net business profits reported on Schedule C or partnership earnings reported on Schedule K-1, reduced by the deductible portion of self-employment tax (IRC Section 164(f)) and contributions made to self-employed retirement plans (such as SEP or Keogh plans).
• Taxable Alimony and Separate Maintenance: Court-ordered alimony received under divorce decrees or separation agreements executed on or before December 31, 2018 (amounts received under agreements executed or substantially modified after 2018 are excluded pursuant to the Tax Cuts and Jobs Act).
• Nontaxable Combat Pay: Excludable combat zone compensation under IRC Section 112 is treated as eligible compensation for IRA purposes.
• Qualifying Fellowships and Stipends: Fellowship and stipend payments made to graduate or postdoctoral students to the extent such payments are reported as taxable compensation (IRC Section 117).

Compensation does not include unearned or passive investment income, such as dividends, interest, capital gains, rental income (unless the taxpayer is a licensed real estate professional actively operating a trade or business), pension or annuity payments, deferred compensation distributions, Social Security benefits, or unemployment compensation.

Spousal Roth IRAs (IRC Section 219(c))

Under the Kay Bailey Hutchison Spousal IRA provisions of IRC Section 219(c), a non-working or lower-earning spouse who does not have sufficient earned compensation in their own right may establish and fund a Roth IRA based on the earned compensation of their working spouse. To qualify, the couple must satisfy three statutory criteria:

1. The couple must be legally married as of the close of the taxable year.
2. The couple must file a joint federal income tax return (Married Filing Jointly).
3. The working spouse's taxable earned compensation, reduced by any Traditional or Roth IRA contributions made on their own behalf, must equal or exceed the contribution made to the non-working spouse's Roth IRA.

Each spouse maintains their own separate custodial account; IRAs cannot be held jointly. Each account is subject to the individual annual contribution ceiling and the joint MAGI phaseout thresholds.

Annual Contribution Limits and Catch-Up Provisions

Under IRC Section 219(b)(5), regular IRA contributions are subject to a statutory annual dollar ceiling that is shared across all Traditional and Roth IRAs maintained by an individual. An individual cannot contribute the maximum statutory amount to a Traditional IRA and simultaneously contribute the maximum amount to a Roth IRA in the same tax year.

For tax year 2026, the statutory annual contribution limit is the lesser of:

• $7,500 ($7,000 for 2024 and 2025), or
• 100% of taxable earned compensation.

Age 50+ Catch-Up Contributions

Under IRC Section 219(b)(5)(B), an individual who attains age 50 or older by December 31 of the applicable tax year is entitled to make an additional catch-up contribution. For 2024 and 2025, this catch-up allowance is $1,000, bringing the total permissible annual limit to $8,000 (or 100% of earned compensation, whichever is less). Section 108 of the SECURE 2.0 Act indexed this catch-up amount in $100 increments; it stayed at $1,000 for 2024 and 2025 and rose to $1,100 for 2026, making the 2026 total for age 50+ $8,600.

If a 52-year-old taxpayer contributes $5,000 to a Traditional IRA in 2025, the maximum remaining regular contribution they may deposit into a Roth IRA for 2025 is $3,000 ($8,000 total limit minus $5,000 Traditional IRA contribution), assuming their income falls below the Roth phaseout thresholds.

Modified Adjusted Gross Income (MAGI) Phaseout Thresholds

Unlike Traditional IRAs—where income limitations affect only the deductibility of contributions for active retirement plan participants—income limitations on Roth IRAs govern the taxpayer's legal eligibility to make the contribution itself. High-earning taxpayers are phased out of making regular annual Roth IRA contributions based on their Modified Adjusted Gross Income (MAGI).

Calculating MAGI for Roth IRA Eligibility

MAGI is computed by starting with the taxpayer's Adjusted Gross Income (AGI) from Form 1040, Line 11, and adjusting it pursuant to IRC Section 408A(c)(3). Specifically, the taxpayer must:

1. Subtract: Any taxable income resulting from the conversion of a Traditional, SEP, or SIMPLE IRA to a Roth IRA, and any taxable rollovers from employer-sponsored qualified plans to a Roth IRA.
2. Add back:
   • Traditional IRA deduction (IRC Section 219);
   • Student loan interest deduction (IRC Section 221);
   • Foreign earned income exclusion (IRC Section 911);
   • Foreign housing exclusion or deduction (IRC Section 911);
   • Qualified adoption expenses exclusion (IRC Section 137); and
   • Excludable income from U.S. savings bonds used for higher education (IRC Section 135).

Statutory Phaseout Ranges for 2025 and 2026

The IRS indexes Roth MAGI phaseout ranges annually under IRC Section 408A(c)(3). The official thresholds (IRS Notice 2025-67 for 2026) are outlined below:

Pro-Rata Reduction Formula and the $200 Statutory Floor

When a taxpayer's MAGI falls within the phaseout window, their maximum allowable contribution is reduced pro-rata using the statutory reduction formula:

$$\text{Excess MAGI} = \text{Taxpayer MAGI} - \text{Phaseout Floor}$$ $$\text{Phaseout Range} = \text{Phaseout Ceiling} - \text{Phaseout Floor}$$ $$\text{Reduction Amount} = \text{Maximum Contribution Limit} \times \left( \frac{\text{Excess MAGI}}{\text{Phaseout Range}} \right)$$ $$\text{Permissible Contribution} = \text{Maximum Contribution Limit} - \text{Reduction Amount}$$

Two rounding and floor rules (applied through IRC Section 408A(c)(3) and shown on Pub. 590-A Worksheet 2-2) must be strictly applied on the CISP examination:

1. Rounding Rule: If the reduced contribution limit is not a multiple of $10, round it UP to the next multiple of $10 (for example, $4,131 becomes $4,140). This mirrors the rounding used for traditional IRA deduction phase-outs.
2. The $200 Statutory Floor: If the calculated allowable contribution is greater than $0 but less than $200, the taxpayer is legally permitted to contribute a flat $200. However, if MAGI equals or exceeds the phaseout ceiling, the allowable contribution is strictly $0 (the floor does not apply once the taxpayer hits or exceeds the top of the bracket).

Calculation Example

Consider an unmarried 42-year-old taxpayer in 2025 with a MAGI of $156,000. The maximum statutory limit is $7,000. The 2025 Single phaseout range is $150,000 to $165,000 (a $15,000 spread).

• Excess MAGI: $156,000 - $150,000 = $6,000.
• Reduction Fraction: $6,000 / $15,000 = 0.40 (40%).
• Reduction Amount: $7,000 × 0.40 = $2,800.
• Permissible Contribution: $7,000 - $2,800 = $4,200.

Now consider a married couple filing jointly in 2025 with MAGI of $245,800. The age-40 spouse wants to contribute. The MFJ range is $236,000 to $246,000 (a $10,000 spread).

• Excess MAGI: $245,800 - $236,000 = $9,800.
• Reduction Fraction: $9,800 / $10,000 = 0.98 (98%).
• Reduction Amount: $7,000 × 0.98 = $6,860.
• Tentative Contribution: $7,000 - $6,860 = $140.
• Because $140 is greater than $0 but less than $200, the statutory floor overrides the formula: the spouse is permitted to contribute $200.

Contribution Deadlines and Complete RMD Exemption

Contribution Deadlines (No Extension)

Under IRC Section 219(f)(3), annual regular contributions to a Roth IRA must be made by the due date of the individual's federal income tax return for that tax year, excluding extensions. For calendar-year taxpayers, this deadline is April 15 of the following calendar year (or the next business day if April 15 falls on a Saturday, Sunday, or legal holiday).

A vital operational concept for bank personnel is that obtaining an extension of time to file federal income taxes (such as filing Form 4868 for an automatic 6-month extension to October 15) does not extend the deadline to make a regular annual Roth IRA contribution. The contribution must physically reach the custodian or be postmarked by April 15. Contributions received between January 1 and April 15 must be clearly designated by the depositor as either a "prior-year contribution" or a "current-year contribution."

Exemption from Lifetime Required Minimum Distributions

Under IRC Section 408A(c)(5), the minimum distribution rules of IRC Section 401(a)(9)(A) do not apply to Roth IRAs during the lifetime of the original account owner. Unlike Traditional IRA owners—who must commence Required Minimum Distributions (RMDs) by April 1 following the year they reach their statutory RMD age (age 73 under SECURE 2.0 through 2032, and age 75 starting in 2033)—original Roth IRA owners are never required to withdraw funds during their lifetime.

The original owner may leave 100% of the assets in the Roth IRA to continue compounding tax-free until death. However, bank administrators must recognize two crucial caveats:

1. Inherited Roth IRAs: Upon the death of the original owner, the beneficiary distribution requirements of IRC Section 401(a)(9)(B) do apply. Non-eligible designated beneficiaries must deplete the inherited Roth IRA within 10 years pursuant to the SECURE Act.
2. Employer Designated Roth Accounts: Prior to 2024, designated Roth accounts inside 401(k) and 403(b) plans were subject to lifetime RMDs. Section 325 of the SECURE 2.0 Act eliminated pre-death RMDs for employer designated Roth accounts effective for taxable years beginning after December 31, 2023, fully aligning employer Roth accounts with individual Roth IRAs.

Bank Administrative Scenarios & Operational Compliance

In daily bank operations, IRA administrators frequently encounter deposit processing, reporting, and customer excess contribution challenges.

Administrative Custodial Processing and Form 5498 Reporting

When a customer presents a contribution deposit between January 1 and April 15, the bank's IRA operations department must verify that the customer has executed an IRA Deposit Form designating the specific tax year. The Form 5498 instructions tell trustees to obtain the participant's designation for deposits made between January 1 and April 15; institutional procedures commonly treat an undesignated deposit as a current-year contribution and confirm the intended year with the owner.

Custodians report all regular annual Roth contributions to the IRS and account owners on Form 5498 (IRA Contribution Information) in Box 10 ("Roth IRA contributions"). Form 5498 must be filed with the IRS and mailed to the participant by May 31 following the contribution tax year. This extended May 31 deadline allows custodians to capture all prior-year contributions made through the April 15 cutoff.

Non-Enforcement of MAGI Eligibility by Custodians

A frequent area of confusion among bank staff is whether the depository institution is legally obligated to verify a customer's income before accepting a Roth IRA contribution. No statute or regulation requires custodians to police, verify, or calculate a customer's MAGI. The bank's fiduciary and custodial responsibility is limited to ensuring the contribution does not exceed the statutory ceiling ($7,500, or $8,600 if age 50+, for 2026) and reporting the deposit accurately in Box 10 of Form 5498. The legal responsibility for determining MAGI eligibility and calculating phaseout reductions rests entirely with the taxpayer when preparing their federal income tax return.

Operational Handling of Excess Contributions

If an individual contributes $7,000 to a Roth IRA in February, but a year-end bonus unexpectedly pushes their MAGI above the phaseout ceiling, the $7,000 represents an impermissible excess contribution. To avoid the punitive 6% annual excise tax under IRC Section 4973, the customer must correct the excess before their tax return filing deadline (including extensions). The bank's operations team can assist the customer by processing either:

1. A corrective distribution of the excess contribution plus Net Income Attributable (NIA) under IRC Section 408(d)(4); or
2. A statutory recharacterization under IRC Section 408A(d)(6), transferring the contribution and NIA to a Traditional IRA.