Minimal Earned Income

• The Internal Revenue Service mandates that you must have earned income during any year that you contribute to a Roth IRA. Earned income, as defined by the IRS, includes money you earn from self-employment or money paid to you for work you perform. Money received from stock or bond returns counts as unearned income. Your contribution cannot exceed your amount of earned income for the year or the annual contribution limit, whichever is smaller.
  
  

Maximum Modified Adjusted Gross Income

• The IRS also sets maximum modified adjusted income limits (MAGI) that cap who can make a contribution to a Roth IRA. Instead of a single, hard cap, the IRS uses a phaseout range, which differs between different filing statuses. If your MAGI falls between the maximum and minimum of the phaseout range, you can still contribute to a Roth IRA, but your maximum annual contribution decreases relative to how close your income is to the maximum amount. These limits change each year. For 2011, the phaseout range for singles goes from $107,000 to $122,000. The phaseout range for married couples filing jointly goes from $169,000 to $179,000. For married couples filing jointly, the phaseout range goes from $0 to $10,000. If your income exceeds the phaseout range, you cannot make a Roth IRA contribution.
  
  

Spousal Roth IRA Contributions

• If do not work, and therefore do not have earned income for yourself, you usually cannot contribute to a Roth IRA. However, the IRS permits an exception for spouses making a Roth IRA contribution. If your spouse works and has enough earned income to equal both of your contributions, you can still make a contribution. For example, if your contribution limit is $5,000 per person and your spouse makes more than $10,000, you would meet the earned income requirement.
  
  

Excess Contribution Penalties

• Knowing the Roth IRA income restrictions is important if you do not qualify, the IRS imposes a 6 percent excess contributions penalty each year you leave the money in the account. This often occurs if your income unexpectedly rises over the limit during the year and you have already made your contribution. If you realize you have contributed too much, you can avoid the penalty by withdrawing the excess contributions plus any returns by the time your tax return is due.