Roth IRA Compensation Rules

• To contribute to a Roth IRA, you must have compensation. Compensation is defined as your hourly wages, salary, tips and bonuses from a job. It can also be your self-employment income after you deduct your contributions to qualified retirement plans and one-half of your self-employment tax, but before you deduct your expenses and losses. The IRS also includes taxable alimony and support payments, and nontaxable combat pay as compensation. If you had any of these sources of income during the year, you can make a Roth IRA contribution up to 100 percent of the value of that compensation or your Roth IRA annual limit, whichever is lesser.
  
  

Spousal Contributions

• If you are married, your compensation is combined for Roth IRA contributions if you file taxes jointly. If you had no compensation, your Roth IRA contribution can be up to 100 percent of your spouse's compensation less her Roth and traditional IRA contributions or the annual IRA contribution limit, whichever is lesser.
  
  

Corrective Actions and Penalties

• If you did deposit too much into your Roth IRA account, you must take corrective action or face a penalty. The simplest way to do this is to take a corrective distribution. You must remove your excess contribution and any earnings. You can calculate the earnings by multiplying the value of your excess contribution by the account's rate of return over the time the contribution was in the account. Your IRA provider can help you with this calculation, or you can consult IRS Publication 590 for full instructions. You need to complete this withdrawal by your tax filing deadline, with extensions, to avoid a 6 percent penalty.
  
  

Tax Form Adjustments

• If you do not catch the error before you file your taxes, you must file an amended tax return to reflect the adjustment. If you file the amended return before your tax filing deadline, you still won't owe a penalty. In either case, you won't owe additional taxes since Roth contributions don't offer a tax deduction. You do need to amend your return, however, as failure to report the correction could result in disqualification of the account and tax fraud penalties.