Roth Ira Contributions – An Interesting “work-Around” To The Income Limits

[If you are an investor who makes more than the income limit for contributions to a Roth IRA - this MAY be for you!]

 

Many people have Roth IRA’s that they opened in the late 1990′s.  For some, they have been unable to contribute to their Roth IRA since then, due to income limits.  In 2009 and 2010, the income limit for someone to contribute to a Roth IRA (married, filing jointly) is $176,000 and $177,000, respectively.  [This limit is based on Adjusted Gross Income (AGI) and the amount that someone can contribute starts to phase out at $166,000 (2009) and $167,000 (2010)]

In 2009 and 2010, the maximum contribution is $5000 for each year (this amount is higher if you are over 50).

There has always been both an income limit for contributions and a maximum amount that could be contributed.  It has been indexed for inflation each year.

 Conversions from a Traditional IRA to a Roth IRA are a different story.  The income limit has been $100,000 since the inception of the Roth IRA.  In 2010, this limit was removed (much more on this in other postings).  In other words, in 2010 anyone, regardless of income, can convert funds in a Traditional IRA to a Roth IRA.

This has introduced an interesting “work around” to the AGI limit for contributions mentioned at the top of this article.

While I have seen it mentioned in some blogs and other articles, I am surprised that I haven’t seen it more often in the mainstream media.

If you make more than the income limit to contribute to a Roth IRA, this may be for you…………….

Here is how it works:

1.     Open a Traditional IRA

2.     Make the maximum contribution for 2009 (by April 15th) and 2010 – $5000 for each year, unless you are over 50

3.     Don’t deduct the contribution (I will explain in a second)

4.     Immediately convert the Traditional IRA to a Roth IRA 

5.     Voila!  You have just gotten $10,000 into a Roth IRA when you otherwise would have been forbidden to do so (based on your income)

Since you didn’t deduct the contribution, there are no taxes due on the conversion (unless there was some interest or gain between the time you opened the Traditional IRA and the conversion – that is why I stressed converting immediately after the account is opened). 

Yes.  I know.  Seems too good to be true!  Well, there is at least one “catch”….

Non-deductible IRA’s are aggregated with all other IRA’s to determine what proportion of the conversion would be taxable.  If you have an IRA rollover from a previous employer (or any IRA that has pre-tax money in it), then at least a portion of the conversion would be taxable.

For that reason, this strategy works best when an investor has NO OTHER TRADITIONAL IRA MONEY.

401(k)’s that are at previous employers don’t count against you…..as long as they are still in the 401(k) – and not in a Rollover IRA.

Conversions to a Roth IRA

The fund that you roll over from a traditional IRA into a Roth IRA are taxable in the year of the rollover. For example, if you rollover $50,000 in 2009. Even though a conversion to a Roth IRA causes you to pay current taxes on the amount rolled over, the amount will then grow tax-free in the Roth IRA.Roth IRA rollovers work best if you have funds outside the IRA to use to pay taxes on the rollover. For example, a rollover of $50,000 into a Roth IRA may result in $10,000 in income taxes. It’s best to rollover the entire $50,000 and pay the taxes with $10,000 that you have outside your IRA. If you need to take $10,000 from your traditional IRA to pay the taxes, you wind up with only $40,000 left to rollover into the roth IRA.A traditional IRA can be converted to a Roth IRA in one of three ways:Rollover: Assets from a traditional IRA can be contributed (rolled over) to a Roth IRA within 60 days after their distribution.Trustee-to-trustee transfer: The financial institution holding the traditional IRA assets transfers those assets to a Roth IRA. In this case, the transfer should be simpler because it occurs within the same financial institution.Here are a few upcoming changes for conversions:Effective after December 31, 2007, direct rollovers from the tax-qualified retirement plans to Roth IRAs will be permitted. These rollovers are subject to the same rules that apply to conversions from a traditional IRA to a Roth IRA.Effective for tax years beginning after December 31, 2009, the requirement that a taxpayer’s gross income no exceed $100,000 to be eligible to convert a non-Roth IRA to a Roth IRA will be eliminated.A special rule has been established for rollovers to Roth IRAs in 2010. Amounts rolled over into a Roth IRA in 2010 aren’t included in your income in 2010; instead, 50 percent of the amount is included in your income in 2011 and 50 percent in 2012. That’s quite a deal for the year 2010 because none of the rollover will be included in your income. This deal is something you should seriously consider.

Roth Conversions – Important Differences in Traditional IRAs and Roths

Changes in the law in 2010 present some unique opportunities to investors that might be considering conversion of their existing traditional IRA to a Roth. An important first step in deciding whether or not to convert is understanding some of the similarities and differences between the two types of accounts.

View full post on Investing: IRA 401k Articles from EzineArticles.com

Can I roll my 401(k) to a Roth IRA?

Why Should I Roll My 401(k) to a Roth IRA?Rob works for a company that offers a 401(k) plan. He has decided to leave his current job, accepting a new job offer with a different employer. He now has some decisions to make regarding his current 401(k) plan. Rob has some options that are available. He can cash it out and take what is in the account, minus taxes, but this is not advised. He asked his advisor the question, “can I roll my 401(k) to a Roth IRA?” The answer is yes, and it is probably the best thing to do. If Rob does decide to go ahead with the rollover, he must already have an existing Roth IRA account. If he does not, he will have to open a new account before proceeding with the rollover process.Types of Rollovers:Direct Rollover from 401(k) to Roth IRAIn regards to his 401(k) plan, Rob has two types of rollover options to choose from. The first is a direct rollover. This is usually the best option. With a direct rollover, the funds from Rob’s current 401(k) account will simply be sent over to the existing Roth IRA account. The only requirement is that Rob must already have an open Roth IRA account. With this type of rollover, there will be no IRA penalties or taxes involved. It is a simple matter of transferring the funds from one account to the other and the process moves very quickly.Indirect Rollover from 401(k) to Roth IRAThe other type of rollover Rob can elect is indirect. This can be a bit complicated than the direct rollover. Rob has been trying to find the answer to whether he can roll his 401(k) over to a Roth IRA. Now that he has determined that is possible, some valuable time may have already been wasted, especially if he is opting for the indirect rollover. An indirect rollover occurs when there were distributions made from the 401(k). For example, Rob will receive a check for the amount from his 401(k) account. When he receives this check, he will immediately notice that the amount does not coincide with his recent statement. This is because 20% has been taken out of the amount to pay for taxes. This is where things can get complicated. For Rob to complete a rollover, he must follow all IRA rules. First of all, the rollover must consist of the entire amount that was in your 401(k). For example, if Rob has $100,000 in the account, he will receive a check for $80,000. When he goes to perform the indirect rollover, he will have to find a way to produce that 20% that was taken for taxes. This means that it is his responsibility to add $20,000 to the amount of the check. This may sound like a lot of money, and it is, seeing as he has to come up with it quickly, but as long as Rob follows the rules, he will receive that 20% in his tax returns at the end of the year.Indirect Rollover: 60 Days to Complete the Transfer of FundsAs if that is not complicated enough, there is more! In addition to the 20% subtraction for taxes, Rob must now abide by a set timeframe in which to complete the rollover. From the date the he receives a check for the distribution from his 401(k), he will have only 60 days to complete the rollover. If Rob does not currently have a Roth IRA, he will have to take the time to open a new account. Upon making the transfer when the account is ready, Rob will have to make sure to include the $20,000 taken for taxes. So, he has 60 days to come up with the money, open a Roth IRA account and complete the transfer.Requirements for a Roth IRANow that Rob has received all of the information he needs to determine that he can roll his 401(k) to a Roth IRA, he now must make sure that all eligibility guidelines for the Roth IRA are met. Of course, if Rob already had an existing account, he does not have to worry about this. However, if he does have to open a new Roth IRA, it is important for him to be aware of the Roth IRA rules. One of the most important factors will be the amount of Rob’s income. According to Roth IRA rules, Rob’s current adjusted gross income cannot exceed $120,000 per year. If Rob’s income exceeds this amount, he will not be able to open a Roth IRA account, in which case, he will have to roll his 401(k) over to a different type of retirement account.Since Rob is leaving his current job, he must make a decision regarding his 401(k) plan. Rolling over his plan to an IRA retirement account is his best option. A direct rollover is preferred, because it is a faster and simpler process, but it is not always possible. The entire process of rolling over your 401(k) to a Roth IRA, regardless of what type of rollover is conducted, is not overly complicated as long as you abide by IRA rollover chart rules.  Rob no longer needs to ask his advisor, “can I roll my 401(k) to a Roth IRA?”

Should I convert my rollover IRA to a Roth IRA, considering it is at half the value it was?

I have a Rollover IRA that has lost half its value. If I convert it to a Roth IRA, I will pay taxes now, but it will grow tax free from now on. Should I convert it now, or should I let it ride, and pay taxes down the road (25 years)?

Can I roll my Canadian RRSP plan into my US Roth plan & receive benefit of new tax law allowing IRA rollover?

I am Canadian Citizen & US resident alien living in US and want to take advantage of new 2010 tax law that allows traditional IRA rollover into a Roth, BUT want to use my RRSP Canadian retirement funds to roll into Roth. Can this be done and, if so, how?

401k Rollover to Roth IRA Explained

401k rollover to Roth IRA is an option for some. Consider how this type of 401k rollover works and how it may be a better choice for those who want different tax advantages over the 401k or the IRA.

View full post on Investing: IRA 401k Articles from EzineArticles.com

Lurking Dangers When Converting to a Roth IRA

Congress has made it more attractive to convert your standard IRA to a Roth IRA. Should you take the bait?

View full post on Investing: IRA 401k Articles from EzineArticles.com

Should I Convert My Roth IRA?

Fred is working hard and because of the new Roth conversation rules is considering converting his traditional. Should Fred do it?

View full post on Investing: IRA 401k Articles from EzineArticles.com

Roth IRA – Advantages and Disadvantages

The Roth IRA is a newer retirement investment account designed to help individuals to build their retirement nest egg. In contrast to a Traditional IRA, the contributions made to the Roth IRA are not tax deductible. Also, the funds when withdrawn from the after the age of 59 ½ are tax-free, unlike the Traditional IRA which is taxable when the funds are withdrawn.

View full post on Investing: IRA 401k Articles from EzineArticles.com

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