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For the tax year 2007, you cannot make a full contribution of $4,000 ($5,000 if you are 50 years or above) to a Roth IRA if your income exceeds $99,000 for individuals and $156,000 for married couples filing jointly. For the tax year 2008, the contribution limits have risen and it is $5,000 for people under 50 and $6,000 for people who are 50 years and older. The income limits to contribute to a Roth IRA for 2008 are $101,000 for individuals and $159,000 for married couples filing jointly. If your income exceeds these limits, you can still make partial contributions to a Roth IRA.
When you make contributions to a Roth IRA, the IRS looks at your modified adjusted gross income which is nothing but all your income other than that from any Roth IRA conversions and few others. To contribute to a Roth IRA, you must have earned the money. This earned money can be from wages, salary, tips, bonuses, self-employment income, commissions or even professional fees.
If you make a contribution to a Roth IRA and then your income for the tax year exceeds the limit, one option is open to you. You can characterize the contribution as traditional IRA contribution. In order to do this, you will have to execute the transfer from your Roth IRA to a traditional IRA using trustee to trustee transfer. You will have to inform both the account trustees that you are recharacterizing the contribution and you can report the recharacterization on your tax return for the year when you made the contribution.
The other alternative open to you is to withdraw the original contribution. According to the rules, you can withdraw contributions (and not earnings) at any given point with attracting tax or early withdrawal penalty.
No matter which step you take, if your income exceeds the Roth IRA contribution limits, you should not leave it in as you will have to pay a 6 percent penalty, and an excise tax.
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