Roth IRA 2011 vs. 2012 Contribution and Income Limits and Conversion Rules From Traditional IRA Retirement Accounts

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[Updated with 2012 Roth IRA Limits] The IRS has released 2012 IRA information and there is no change to Roth IRA contribution limits over 2011 levels. Income ranges have increased slightly meaning more people are eligible to open a Roth IRA account in 2012. Updated details and a comparison to 2011 levels are shown in the table below.
2012 Roth IRA Contribution Limits and Income Ranges

Looking to open your first IRA or to rollover retirement assets from a previous employer’s 401(k)s or IRA held elsewhere? Then consider opening a no-fee Traditional or Roth IRA retirement account with TD Ameritrade to reduce your taxable income by up to $6,000.


2012 Roth IRA conversion from Traditional IRA:
The rules for 2012 conversions are identical to the 2011 rules, meaning anyone can convert a 401k or a Traditional IRA to a Roth IRA regardless of income. However the ability to spread the tax burden of the taxes you must pay when converting to a Roth IRA, will no longer be available in 2012.

Remember, you can make contributions to your 2011 Roth IRA until April 17th of 2012, and to April 15th 2013 for your 2012 Roth IRA. I encourage you to subscribe (free) via Email or RSS to get the latest retirement plan updates and related tax information.

[Click here for the recently released 2013 Roth IRA limits and income deduction thresholds]

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[2011 Roth IRA Limits] Following my updated article on new 401K and IRA limits, I thought I would look at some of the changes being made around traditional and Roth IRA’s in the year ahead, including contribution and recently introduced opportunities to convert between traditional and IRA accounts irrespective of income. Roth IRA’s generally differ from traditional IRA’s in that contributions are made after tax, but this is offset by having to pay no taxes when the funds are withdrawn at retirement.

Opening and contributing to a Roth IRA is currently restricted to those with an adjusted income limit (AGI) of $122,000 (individuals) and $179,000 (couples). The maximum annual contribution to Roth IRA’s is generally $5,000 for savers under the age of 50 and $6,000 for savers over 50. The table below provides a summary of Roth IRA contribution/AGI income limits from the IRS.

2011 Roth IRA Contribution and Income limits ChartWhen Can You Make Contributions? You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions). This means that most people can make contributions up to April 15. For example, you can start or make 2010 Roth IRA contributions until April 15th 2011.

Rules for Roth IRA Conversions

You can also convert from a traditional to Roth IRA, but the rules were quite restrictive. Only taxpayers with Modified Adjusted Gross Incomes (MAGI) of less than $100,000 in the year of conversion and not married filing separately may convert from a traditional IRA to a Roth IRA. However new tax laws in 2010 changed the conversion limit, meaning that people who have or are interested in investing for retirement via IRA’s need to look at which vehicle and contribution method (post or pre tax) is best for their situation.

From next year all taxpayers – even those making more than $100,000 a year in adjusted income – will be allowed to convert to Roth IRA accounts from Traditional IRAs. That means that more than 15 million Americans, can consider whether they want to make tax-deductible contributions if they have a traditional IRA or pay the taxes up front and have tax- free withdrawals during retirement with a Roth IRA. Which is better depends on future tax rates and how much the conversion will cost. It may not make sense to pay taxes today at a higher rate because many investors will be in a lower tax bracket during retirement, according to Tom Orecchio in a recent Bloomberg interview of various tax and financial planners, a fee- only adviser at Modera Wealth Management. “From a tax perspective, I think when people do the math, it’s not going to be as game changing as they expect it to be,” Orecchio said.

For example, a taxpayer in the 28 percent federal tax bracket who shifts $100,000 of pretax dollars to a Roth IRA from a traditional IRA would pay $28,000 in taxes, in addition to whatever is owed in state taxes. “There are many people who simply don’t have that kind of a side account to pay the income tax, so for them it isn’t very practical to consider a Roth,” said Christine Fahlund, a senior financial planner at T. Rowe Price Group Inc. in Baltimore. A partial conversion to a Roth IRA from a traditional IRA may be the most tax-efficient plan because of the diversification benefits, said Orecchio, who estimates about half of his clients may convert some money to a Roth IRA next year. “You never know how the tax code will work in the future. By owning different IRAs, you’re protected from whatever the government might decide to do,” Orecchio said.

Partial conversions may also be desirable for those with larger portfolios that would require a large tax payment at conversion, said Fahlund of T. Rowe Price. And the flexibility of partial conversions can also be beneficial to those who are self- employed or whose income varies year to year. In a year with less income, an investor can convert less of a traditional IRA to avoid having a larger tax burden for the year, according to Fahlund.

Holding Period

The Roth accounts, including those converted from traditional IRAs, must be held for five years and account holders must be at least 59 and a half before money can be withdrawn tax free. Savers who don’t follow the withdrawal rules or meet exemptions face a 10 percent penalty for distributions. Investors who decide to convert to Roth IRAs must declare the conversion amount on their tax forms. The tax owed depends on whether the assets being transferred are made up of pre or post-tax dollars. In 2010 only, converters will be able to pay the tax liability in 2011 and 2012.

There’s a fallback for investors who decide to convert and regret the decision. A Roth can be switched back to a traditional IRA account, or re characterized. Since investors who convert to a Roth IRA don’t have to pay taxes on the conversion until the following year, they have until April 2011, or October 2011, if they get an extension to file, to reverse the conversion, said Slott, the IRA consultant.

[2010 Update] Vanguard recently published some good factors to consider when considering converting an IRA to a Roth IRA. These include:

1. You have to pay taxes on the amount you convert. In return for the potential future tax breaks of a Roth, you have to pay income taxes when you convert. That means if you have money in a traditional IRA that you haven’t yet paid taxes on, you could have a substantial tax bill. Say you’re in the 28% tax bracket, you could owe $28,000 on a conversion of $100,000. Still, converting may benefit you in the long run if you expect you’ll be taxed at a higher rate when you retire. If you expect your rate will be lower, converting may not be beneficial. If, like most people, you’re not sure what your future tax rate may be, you could consider converting just part of your traditional IRA to a Roth. Doing so gives you “tax diversification” because you’ve got some money in a Roth and some still in a traditional IRA.

2. It’s a good idea to use money outside of your IRA to pay the conversion taxes. You can get the most benefit from switching to a Roth if you can pay the conversion taxes without using money from your IRA. If you convert and don’t pull money out of your IRA, you can increase your after-tax purchasing power in retirement. In effect, $10,000 in a Roth IRA gives you more to spend in retirement than $10,000 in a traditional pre-tax IRA. Remember, taxes could substantially reduce the amount you’re left with when you withdraw from the traditional IRA.

And there’s another reason not to tap your IRA for the conversion taxes: If you’re under age 59½, the amount you withdraw may be subject to a 10% IRS penalty. A cash account may be a good place to get the money to pay the taxes on the conversion.

3. You can lighten the tax burden of a conversion. If you don’t have enough money to pay taxes on converting all your traditional IRA assets, or if doing so would push you into a higher tax bracket, you can consider converting just part of your assets. In addition, a special provision applies to 2010 conversions that gives you the option of postponing the tax bill and paying it off over two years. If you choose this route, taxable income that results from the conversion gets split evenly between 2011 and 2012. But be aware that tax rates are scheduled to go up in 2011, so—barring any new tax legislation—you could end up paying taxes at a higher rate.

4. Penalties may apply if you withdraw within five years of a conversion. A conversion may not be for you if you expect you’ll withdraw the money within five years. Generally speaking, you’ll only be able to withdraw earnings from the account without taxes and penalties if you’re age 59½ or older and you’ve held the Roth IRA for at least five years.As for withdrawals of your original conversion amount, those are tax-free. But to avoid a 10% IRS penalty, you generally must be either at least age 59½ or wait at least five years after your conversion to make the withdrawal.

5. Your heirs may benefit from the conversion. During your lifetime, you don’t have to take money out of the Roth IRA because you’re not subject to RMDs. That means you can leave the entire accumulated balance to someone else. And while a beneficiary who inherits your Roth IRA may be subject to RMDs, he or she can withdraw the amount of your original conversion tax-free. Any earnings are also tax-free, provided that the Roth IRA meets the five-year holding requirement.

Related:

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Single Step Personal Finance Challenge- Roth IRA
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Why the fall in stock prices was good for your 401K
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401K Basics
~ Roth 401K and IRA Basics and Contribution Limts

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{ 69 comments… read them below or add one }

Ray June 20, 2012 at 10:41 am

My MAGI prevents me from contributing to a Roth IRA. Can I contribute to a Traditional IRA, not take an IRA deduction on the 1040, and then convert the Traditional IRA to a Roth? In this scenario, I will be converting taxed income from the Traditional to the Roth IRA. If this is allowed, is the conversion limited to the amount of my original contribution to the Traditional IRA or can I convert the total amount that the contributions may have grown to over the year?

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Don P. August 10, 2012 at 2:33 am

I’m satisfied this contributing to the Traditional and then converting to the Roth (can be converted immediately if desired) works. My credit union consulted with the experts who handle their IRAs and confirmed this works. When the rules first changed the credit union seemed less sure and hadn’t yet consulted their experts. Now the credit union seems sure and even keeps my Traditional account open with a zero balance to avoid having to open a new Traditional account each year only to have the funds immediately converted to a Roth. My daughter got the same “this works, no question” answer from her IRA investment firm (Vanguard?).

I’m reasonably certain you can convert the entire balance to the Roth, but you pay taxes on the earning that you are converting. If you convert immediately from the Traditional to the Roth there are no earnings.

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Mich April 9, 2012 at 3:23 am

Hi, I earned $5k in 2011, and $45k of foreign income (which was tax exempt in the US since i paid (heavy) tax on it in Germany), because I live/work in Germany, and do consulting work for a US company. I am American married to a German. My filing status is married/Filing separately and my earnings situation will be the same in 2012. Do you think I can convert my $28k Traditional IRA to a Roth and pay tax based on my US income of $5k? I guess the 2nd Q is when converting to a Roth, what is the process of answering questions regarding US and non-US, non-taxable income?

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andys2i April 15, 2012 at 10:39 pm

This is a complex question and one you probably want to see an accountant for (particularly one with foreign income/tax experience). Generally all income worldwide is considered as earned for IRS purposes. The tax treatment differs due to foreign credits and exemptions (if your residence is non-US). But it looks like your MAGI is less than 100K in either scenario so a Roth IRA conversion should be possible for you. Though you may have to pay taxes at your marginal rate that you submit in your US tax return.

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JGSoff April 8, 2012 at 7:05 pm

Question about tax consequences for 401k transfer to Roth.

- For 2011 my AGI was $970.00 (nine hundred seventy dollars) total. I am 53 and unemployed without unemployment benefits.

- I transfered $10,000 from my 401k that I’ve had for over 10 years to my Roth that I have had for a few years.

Would this still be taxed at the 28% income rate? If not, at what rate if any?

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B April 8, 2012 at 11:02 pm

If that is your total income you would barely be taxed at all as your personal exemption and standard deduction total about $9500. You would pay about 10% tax on any amount above that. Your total tax bill would be less than $150.

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Jon April 4, 2012 at 11:55 am

I love the benefits of a Roth IRA and contribute to that versus a Traditional IRA. I just fulfilled my $5,000 max for tax year 2011, and would like to contribute for 2012 soon. But, it looks like my AGI will be increasing close to, if not over the $122K maximum for 2012. What happens if I contribute the $5,000 for the 2012 tax year and my income ends above the maximum for this year? My income is based on commission sales, so it is unknown at this point if my income will be above that maximum level or not. Thank you!

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andys2i April 15, 2012 at 10:32 pm

You can see more on Excess contributions in this article, http://www.savingtoinvest.com/2010/10/check-for-ira-and-roth-ira-excess-contributions-to-avoid-a-6-tax-penalty.html . But basically you may be subject to a 6% tax penalty, unless you take one of the following corrective actions you can take to avoid the 6% penalty:

- Withdraw the excess contribution and any associated earnings. According to the IRS, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This provision only applies if earnings on the IRA contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

- The other is to re-designate your Roth IRA as a regular IRA. This “moves” or reclassifies the excess Roth IRA contributions as a less restrictive traditional IRA contribution, assuming you qualify for a traditional IRA. This will only provide effective relief for the over contribution in some cases.

– Applying excess contributions to a subsequent year. If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. Though you may still be subject to penalties for the years in which you over contributed.

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cathy March 25, 2012 at 5:53 pm

Can you rollover 401K aftertax contributions directly to a Roth IRA tax free?

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Marilyn McDonell February 28, 2012 at 8:16 pm

I am 67 and will not need the money I will be required to take from my IRA at 70-1/2. so it seems to be a good idea if I roll a portion of my IRA into my Roth IRA this year and for the next few years. It will make my required distributions smaller from my IRA and of course then the amounts in my ROTH IRA will grow tax free.

By just doing a portion I will not pay too much in taxes for the next 3 yrs.

Is this a good plan or am I missing something?

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B April 9, 2012 at 12:35 am

Great idea!

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rjm February 17, 2012 at 1:12 pm

My husband is over 50 and I am not. Does this affect the amount we can contribute to a RothIRA? Does he need to open and fund the account so that we can contribute the full $6000?
Thanks.

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andys2i February 18, 2012 at 9:51 am

Roth IRA and Traditional IRA are single person accounts (not joint). So if he opens an account he can contribute the full $6,000. However his eligibility to contribute the full amount depends on both your incomes. Confusing I know, but simply put – > the account is individual, but eligibility and contribution amount is based on joint financial details.

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rjm February 23, 2012 at 12:46 pm

Thanks for the reply. I completely understand which isn’t something you can often say about money matters!

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Bob January 29, 2012 at 11:21 pm

If a contributed to a nondeductible IRA in 2012 (prior to April 17) for 2011 and convert it almost immediately afterward to a Roth IRA in 2012, is it true that I do not owe any tax on the conversion because it was a nondeductible IRA? My MAGI is over $150,000.

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Craig February 12, 2012 at 2:29 pm

Wish someone would answer this question. I did this and the 1099r that I received shows the money as taxable even though my financial advisor said it wouldn’t be. Not sure how to report this since the 1099r says the amount is taxable.

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andys2i February 12, 2012 at 3:54 pm

The Form RRB-1099-R tax statement enclosed is issued by the U.S. Railroad Retirement Board (RRB) and represents payments made to you in the tax year indicated on the statement. ayments and repayments resulting from railroad retirement annuity adjustments are shown on your tax statement, and may be fully or partially subject to taxation. Form RRB-1099-R, refer to IRS Publication 575, Pension and Annuity Income. If you have any questions about how to figure your taxable payments and/or what amounts to show on your income tax returns and/or how to amend income tax returns, contact your own tax preparer or the IRS. If you reside within the United States, you may call the RRB at 1-800-808-0772

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Rand March 10, 2012 at 6:17 pm

Yes, the 1099-R will show that the distribution from the traditional IRA is fully taxable. That’s because the trustee does not know or track the portion of that account that is NOT taxable because you used a non-deductible contribution.

So the answer is that you must show the full distribution as taxable in your software, but THEN, you must indicate it was made with non-deductible contributions (reported on Form 8606) and therefore only the growth on the money is taxable; the rest is not.

If you flip this account a day or two after the original contribution, you likely will have very little or no taxable amount.

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Ming January 11, 2012 at 2:54 am

It seems that AGI limit for Roth conversion isn’t really useful with conversion law change in 2010. People can contribute to traditional IRA first and then convert it to Roth IRA. Paying tax during conversion isn’t losing anything comparing to direct Roth contribution.

Question: for AGI over traditional IRA deduction limit, I can still contribute non-deductable traditional IRA. Then I convert it to Roth IRA. Doesn’t this also defeat any limit on Roth IRA contribution AGI limit? Doesn’t it also make the traditional IRA deduction less useful when one wants to convert to Roth IRA?

Thanks.

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Sunny January 6, 2012 at 8:05 am

This year I was fortunate enough to take a job that changed my income from @ 85K to 135K a year. My wife makes @ 75K a year (so @ 210K combined). I was not aware of the income limits imposed on Roth IRA contributions if combined married income exceeds $179,000……you are not eligible to contribute to a Roth IRA for 2011. What will I have to do if I have been contributing all of 2011 to my established Roth IRA? Is there a way to move 2011 contributions to a traditional IRA without penalty? (since traditional IRA does not have this income based restriciton)

Thank you for the advice.

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andys2i January 6, 2012 at 6:07 pm

If your income exceeds the allowable IRA limits outlined in the article you may be hit with a 6 percent “excess” contribution tax. This tax will be assessed to the contribution, year after year, until you make things right. You have the following options to resolve this:

1. Withdraw the Roth contribution, plus any income and excluding any losses, before you file your tax return for the year you made the contribution. It’s the easiest way to fix the problem.You’ll have to pay tax on any income earned in the year the “excess” contribution was made, but you will not have to pay the “excess” contribution tax, and you will not have to fill out any extra forms. Contact you Roth IRA fund manager for withdrawals (you have until Apr 15 to do this)

2. Morph the Roth into a nondeductible traditional IRA. If you exceed the income limits for a Roth IRA, you can have your Roth contribution and any earnings (or losses) morphed into a nondeductible traditional IRA. The IRS calls this “recharacterization;” the contribution (not the income) gets reported as a nondeductible contribution to a traditional IRA on Part I of Form 8606, Nondeductible IRAs and Coverdale ESAs.

With the “recharacterization,” it’s as if the Roth contribution never existed. There is no income ceiling for a nondeductible traditional IRA; as long as you earn $3,000 in 2002, you can make a $3,000 contribution, even if your modified adjusted gross income is a million dollars.

3. Pay the “excess” tax and carry contribution over to next year (only works if your income is expected to be lower).

For more information on these options, go to IRS Publication 590, Individual Retirement Arrangements (IRAs).

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Kevin December 19, 2011 at 11:37 am

I am recieving SS Disability and a Taxable Disability Benefit from an insurance company (1099-r) are they qualified income for the Roth Contribution

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andys2i December 19, 2011 at 2:18 pm

Generally any taxable income is qualified income for a Roth IRA contribution. If you disability payments are taxable then they would count as qualified income. Otherwise they do not. Check out IRS Publication 17 (2011) for specific details and exclusions.

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Tracy September 20, 2011 at 7:56 am

I cannot open a Roth IRA directly due to the income limitations. Can I open a traditional IRA this year, 2011, and convert it to Roth in 2012? If yes, then can I continue to contribute to this converted Roth even though my income is over the limit?

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Al December 5, 2011 at 7:09 pm

If your income is over the limit for Roth, it does not matter how you open the account. You will not be qualified to contribute even $1 to a Roth account. Your best bet is, as you mentioned, to contribute to a TIRA and then convert it to Roth. Just make sure you keep up with changes in the laws. For example, before 2010, you could not convert into Roth if you made more than $100,000. In 2010, 11, 12, this limit was suspended but it might come back in 2013.

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Tom September 7, 2011 at 7:41 pm

Is it possible to recharacterize a regular Roth IRA contribution to a Traditional IRA? I know that rollovers can be recharacterized but I’m not sure about regular contributions. I’m asking because the $5k contribution this year is about $3k now and it would make more sense to be able to take the deduction and convert back later.

Thanks

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Mariana August 1, 2011 at 4:07 am

My husband has 401K from GM and over 2yrs he is not working for GM. We want to convert the amount (~ $90K) to Roth IRA since this is the year we are both unemployed and will be in lower tax bracket.

What are the conditions for using the 401K or Roth IRA money and avoid the 10% penalty fee and taxes for being First Time Home buyers? We sold our home on a Land Contract in Jan 2010.

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andys2i August 1, 2011 at 4:32 pm

I suggest you check out the IRS.gov site for the finer details on buying a home with 401K funds. The second part of this post covers the rules around a Roth IRA rollover.

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Me August 1, 2011 at 10:31 pm

First, get with a CPA or tax adviser before you do anything, no amount of conversion is too small to cause detriment in the long run if done improperly… both being unemployed and having no income will get you a smaller tax burden but at the same time, you have no income if you mess it up and get a large tax bill. In other words, I have seen people convert/withdraw money only to get stuck with a tax bill that’s 20-50% of the amount then have to take out another withdrawal (create more taxes) just to pay those off. By the end they are far worse off, 50-75% down on their money. SO GET WITH A CPA OR TAX ADVISER FIRST.

For first time home purchase, GM is an employer that offers loans with their 401k, but I think only for current employees, call Fidelity that’s where GM has their retirement. Other than that, 401ks simply do not offer special rules or tax advantages for loans, they have hardships which includes buying a home but you pay regular taxes and penalties.

IRAs offer the first time home credit up to 10k but make sure to look here: http://www.irs.gov and talk to a cpa/tax guy because it’s based on your tax situation but just comes out of your IRA, so most places who offer IRAs can’t tell you if you qualify, they just send you the money then you have to report it correctly.

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Tom July 20, 2011 at 5:20 pm

I rolled over a simple ira to a roth ira, then did the max 5k contribution for 2011 (mixing pre-tax and post-tax dollars). The account has taken a substantial loss and I am planning on recharacterizing the account to a traditional ira so that I do not have to pay the taxes this year.

My question is down the road, how do I figure out how much I owe taxes on when I decide to convert the account back to a roth ira (either in increments of 5k or so or the entire balance). Do I need to figure out the percentage of the account the $5k after tax contribution makes up and pay taxes on a percentage basis as I convert?

For example, if I rolled over 60k of pretax, added 5k after tax contribution, then the account lost value and went to a value of 50k, would I take (( 1 – (5/65)) = 92.3% needs to be taxed…so then of the 50k, if I were to roll over 20k from a new traditional back to a roth ira, .923 x 20k = taxes are owed on $18,460?

Please confirm that I’m looking at this correctly. Appreciate your input

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Me August 1, 2011 at 10:40 pm

Your math is correct but always get with a cpa or tax adviser if you can. If you have other IRAs for example, you would have to convert money pro rata, so if you have the the 92.33% pretax in your 50k account valued at 46,150 and another IRA exactly at 46,150 you would have to convert half from each IRA. From a tax stand point I think this is the same in the end, it’s just in how you have to do it… so get with a tax adviser =(

If you have just the one IRA everything you said sounds correct to me, but based on the example above, there are random rules and I would still recommend getting professional tax help before acting.

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yes July 11, 2011 at 1:12 pm

so this 16500 limit is for employee deduction only or this 16500 includes both, employee contribution + employer match?

Thanks

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andys2i July 11, 2011 at 5:12 pm

$16,500 limit is for employee contributions only. Employer matching does not count in this figure.

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Al December 5, 2011 at 7:17 pm

The limit including the employer match is 40k.

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andys2i December 6, 2011 at 8:59 pm
B April 29, 2011 at 4:40 pm

I am over 60 years old. Due to living off cash for a year I will show zero income for 2011. I have $28,000 in a regular IRA. Can I convert it to a Roth IRA this year? Any limitations on the amount? After deductions I would likely pay no income taxes. Is that possible?

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king April 14, 2011 at 6:30 pm

this is incorrect:

“Opening and contributing to a Roth IRA is currently restricted to those with an adjusted income limit (AGI)”

It should read Opening and contributing to a Roth IRA is currently restricted to those with a modified adjusted income limit (MAGI), which folks will find out is very different if they need to worry about this. . .

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carrie April 12, 2011 at 12:53 pm

When I did my taxes on turbo tax last night The amount taht I rooled over into a Roth from a 401k was not added as additional income that I earned. I am very bafflred by this since I was expecting to ay in 5,000. Turbo tax said that I only owed $300.00, which is not correct

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Chris April 13, 2011 at 8:56 am

Carrie,

How much was the roll over?

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Janet K April 5, 2011 at 2:10 pm

My husband and I have both contributed to a Roth IRA in 2010. Our AGI is above the limit to allow us to contribute to a Roth without paying a penalty. My tax software suggests that we convert the IRAs to traditional IRAs to avoid the penalty. My question is can I convert the contribution for 2010 to a traditional IRA and avoid the penalty for 2010?

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Don P. April 12, 2011 at 7:21 pm

Good to know that your tax software suggested the conversion. I did the deposit and conversion on Dec 31, 2010, but have now gone back to my credit union asking them to reconfirm this is OK as they told me in December. They are checking with their IRA experts and anticipate getting back with an answer tomorrow.

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Eli April 3, 2011 at 12:00 am

Love if anyone can answer this question: I contributed to a traditional IRA earlier on in the year and then after doing my taxes realized my AGI is too high to qualify any of the contribution as a tax write off. This seems pointless now as I will have to pay taxes 2x on the money I put in (now and when I withdrawl). Is there any way to take the money out now, and put it in a Roth?

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andys2i April 3, 2011 at 9:57 pm

If you have already filed your taxes, you can file an amendment to get your refund for extra taxes. Or you can contribute to a Roth and make the adjustment in next year’s taxes.

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Chris April 4, 2011 at 8:50 am

Ask your tax person if it is too late to do a recharacterization of the money.

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Jerry April 5, 2011 at 12:05 am

You won’t have to pay taxes later on the amount you put in, just on the earnings. However, you have to track it in order for this to be of benefit. Because of this fact, I believe many people will mistakenly pay taxes on it again.

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Mike April 7, 2011 at 6:37 pm

Your contribution should be deductible unless you are covered by an employer sponsored plan. The only time traditional IRA contribution limits apply is when the person who made the traditional IRA contribution is covered by an employer sponsored plan. You can check this by looking at your W-2 to see if the box marked “Retirement” (I believe it’s box 13) is checked. You can call your broker and have this recharacterized to a Roth and you will only pay taxes on earnings in the account.

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Chris February 7, 2011 at 4:05 pm

I have a 403(b) at work and would like more information about the Roth 403 (b). Specifically, I am interested in how the Roth IRA I normally contribute to ($5000) affects the amount that I could put into a Roth 403 (b). Does a contribution to the first limit the contribution to the second?

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Jerry April 5, 2011 at 12:07 am

No, the amounts are not combined. So, you could max out your 403b at work ($16,500 or $22,000 if age 50 or over) and contribute to a Roth IRA. However, there are still maximum income limits whereas there are none with the 403b.

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Lori February 4, 2011 at 9:33 am

Were the income limits on an IRA conversion to a Roth only suspended for one year? Or in 2011 can we again fund a non-taxdeductible IRA(due to income limits) and transfer it into a Roth IRA?

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Joe Erhart February 20, 2011 at 10:03 pm

Lori –

I have the same question — Did anyone every respond to your question — If so can you convert? How long do you have to wait? I would be intersted in what you have found out.

Thanks!!

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Russ April 7, 2011 at 5:55 pm

With regards to conversions of traditional IRAs to Roth IRAs, I believe the income and joint filing requirement is eliminated for 2010 and all future years (at least for now). Section 2154E of the US Master Tax Guide states:

“For tax years beginning after 2009, the AGI limit and the joint filing requirement is eliminated.”

This would allow high-income individuals to put money into a non-deductible traditional IRA, and then convert it into a Roth IRA in 2011. This essentially allows high-income individuals to contribute to a Roth IRA.

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Chris February 21, 2011 at 10:46 am

Hi All,

Nobody answered the question but I believe that you can contribute $5000 to your Roth and $16,500 to your Roth 403 (b). The amount that you are putting into the Roth 403(b) will be limited by the amount that you are putting into a tax deferred 403(B) contribution. The limit of $16,500 will be a total for both. My current employer does not offer a Roth 403(b) in our plan but if yours does I believe you can convert your regular 403(b). Sorry, I didn’t research the income limits – I’ve never had that problem.

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Dan January 11, 2011 at 1:39 pm

Hi, My wife and I are considering a conversion of some traditional IRAs to Roths and we meet the new 2011 joint marital income eligibility requirements to do so. However, my spouse and I have not qualifiied for IRA 1040 tax deductions for our contributions of the last few years therefore, our contributions have been with after tax income.

Question: Since we contributed to our traditionals with after tax income, do we still have to pay upfront taxes on the conversion from these traditionals and/or do we get some sort of break in that regard?

Thank you.

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andys2i January 12, 2011 at 11:50 am

As I understand it you would only have to pay taxes on any untaxed contributions, unless specified by the plan. So since you have already paid taxes on your contributions, you won’t be double taxed. However, you WILL need to pay taxes on any investment returns in your traditional IRA which would not have been taxed. To confirm I would contact your Roth IRA fund adminstrator. Also it may be worth engaging the services of an accountant if the sums are significant since figuring the taxed vs untaxed portions could get involved.

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Jane C January 14, 2011 at 7:23 pm

Thank you for addressing my second question. My first one is why would I want to convert my after-tax IRA. I don’t quite understand what the benefit would be.

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andys2i January 15, 2011 at 12:46 pm

The only benefit of converting an after-tax IRA to a Roth IRA is the tax rules that allow all contributions AND gains to be withdrawn tax free after the retirement age.

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Ward Testermn December 29, 2010 at 4:13 pm

I am 70 now and have 100k in my IRA. If I convert to a Roth IRA and pay the taxes, do I have to wait 5 years before I start withdrawals tax free? If I do a self-directed Roth IRA, will I still have to wait the 5 years?
In both cases, what happens to my mandatory distribution amount?

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Mark Hersey February 3, 2011 at 5:51 pm

You have an excellent set of questions. Self direction is of no consequence to the requirements mentioned. RMD (required minimum distribution) disappears in a Roth (which, unlike Traditional, has no RMD). Withdrawal rules say the first funds withdrawn must be considered contributions (by the IRS) until the contributions amount runs out. What’s left then are just the gains.
So the question comes down to whether you being 54.5+ already still need to wait 5 years (or maybe only until the earlier of you are 59.5+ or 5 years later) to withdraw 1) contributions (seems unfair to me for the 59.5+ to wait regardless of the 5 years), and 2) gains (OK maybe fair the 59.5+, since it’s hardly very limiting anyway if the contributions aren’t subject and must be withdrawn first), to avoid being subject to the 10% early withdrawal excise tax.

The rules are very hard for the average Joe to read and comprehend, and in fact I suspect the average article writer may be similarly confused as well. The first thing to realize is that “taxable” does not necessarily mean that the taxes are more than zero. The second that “early withdrawal” does not necessarily mean non-zero taxes either. And the third that no income taxes may not mean no excise taxes. I admit to being confused about the actual answer to your lead question, though I have tried to answer it by reading the rules several times, and probably failed because I was not yet personally affected and thus motivated enough to think it thru. I’m now in the 54.5+ zone. However, my IRA’s were established some 30 years ago and mostly converted to Roth’s as soon as it was available, and now it’s “tax-diversified” by growing Traditional 401(k)’s or in retrospect I would have considered myself later to have made a mistake earlier by doing all of it. So still it does not affect me personally, but I have friends my age in need of advice too. But so far my advice has been, that if you were trying to avoid RMD, then maybe you don’t care so much about the 5 year rules anyway! And if you DO care, just keep the amounts you need for the next 5 years in the Traditional IRA (less an expected growth factor while you are withdrawing it for the next 5 years) and convert “only” the rest to Roth! Then you’ll be exceeding your RMD just like the IRS wants, only now it will be happily. And in the mean time you’ve probably lowered your tax bracket on the some of amount converted, by not putting yourself into quite as high a tax bracket by the conversion. And you’ll also be tax diversifying (I suggest you look up articles on that subject).

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DrTcom May 4, 2011 at 2:28 pm

Thanks, Mark. With your help and some more reading, etc., I have determined that I can withdraw ONLY my original contributions tax free during the 5 year term. Like you say, if I were really worried about the need to withdraw, I could leave some in the Traditional IRA. I was more “intellectually” interested but it also would cover emergencies should they occur.
I also agree that this is one of the least defined area I have ever looked into and I have been “following” my taxes all my life, though I have a preparer actuall do them. It’s almost like they want you to try something and then they will rule on it at audit time:)
Ward

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Mark Hersey February 3, 2011 at 7:25 pm

Quotes are from IRS publication for new to 2011,
stuff in {} is my commented interpretation.

“You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income”
{in the tax year of the conversion/contribution, not the withdrawal!}.

@@ So excise tax does not affect the original contributions to your original Traditional IRA! Just applies to the gains being taxed (and converted) or income being contributed, during the year conversion/contribution.

“Exceptions. You may {do} not have to pay the 10% additional tax in the following situations.
* You have reached age 59½ {regardless of 5 year rules!}.
* You are disabled.
* You are the beneficiary of a {the} deceased {previous} IRA owner {of same IRA}.
* You use the distribution to pay certain qualified first-time home buyer amounts.
* The distributions are part of a series of substantially equal payments {regardless of 5-year rules and 59.5+ness}.
* You have significant unreimbursed medical expenses {for portion exceeding 7.5% of your income}.
* You are paying medical insurance premiums after losing your job.
* The {portion of} distributions {that} are not more than your qualified higher education expenses.
* The distribution is due to an IRS levy of the qualified plan.
* The distribution is a qualified reservist distribution”.

@@ Note that important items here for retirees are mainly the 59.5+ exception,
and “substantially equal” exception.

“If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may {MAY!} be taxable. ”

@@ Emphasis on the “MAY” and think positive, follow the rules and discover it’s often NOT.
In particular, it does not apply to anything already taxed!

@@ So you go thru the rules (“ordering rules” especially) and processes and you find it’s not a qualified withdrawl within the 5-year time frame, but it’s your (earlier OR later) direct Roth IRA contributions being withdrawn first, and converted original Traditional IRA contributions next, your Roth IRA that is not a qualified distribution, part of it may be taxable. and they’re not subject regular tax (double taxation!) nor to excise tax, then the withdrawal was tax-free, EVEN if you are not 59.5+! Usually this is completely overlooked or over generalized by most authors, so get a second opinion. But the already taxed converted Traditional IRA gains (only considered after the contributions and untaxed conversions are used up) are (only) excise taxable if you are NOT 59.5+ and still not excise (no income) taxable if you are 59.5+. Once again, usually completely overlooked by most authors. Finally the Roth gains are income&excise taxable for those 59.5&- (if no applicable exceptions) , but no taxes at all for 59.5+. So for those 59.5+, the income taxes to not exist, and due to ordering rules, the excise taxes are not generally an issue.

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J F Gross December 29, 2010 at 1:26 pm

If my income for 2010 restricts me from a direct contribution into a Roth IRA, can I contribute to a Traditional IRA and immediately convert to Roth? That seems to accomplish the same goal as a
direct contribution to a Roth IRA so I’m wondering if that’s a permissible way aroung the income limitations.

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Mark Hersey February 3, 2011 at 4:53 pm

It’s my understanding that your basic idea here works and is permitted. I believe I have read articles attached to money.com suggesting such a thing particularly for 2010. And this is as long as the MAGI income limit at the time of conversion is not exceeded for income for the year of conversion. This would be of particularly prickly concern if you are making a 2010 contribution in early 2011 (the year after the self chosen official year of contribution) and converting immediately, since the income limit on the conversion is that of 2011 not 2010! And unless they extended the 2010 single year conversion limit, the 2011 income limit might be lower than that of 2010. Note that “re-characterizing” IS backdated to the date of contribution (essentially a “do-over”), but “conversion” IS NOT backdated to the date of contribution and is instead a separate action which effects taxes in the tax year in which it is done. Which answer’s Kevin’s question below (“year-end”)!

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Matt March 21, 2011 at 9:13 am

Mark, I believe there is no MAGI income limit on conversions, which is why this is a “loop-hole” to ROTH IRA contribution income limits to begin with. If your 2010 MAGI is over $167,000, you can put $5,000 into a nondeductible Trad IRA (for 2010) and then immediately convert (which has no income limits) to a ROTH IRA. The income limit on conversions was $100,000 but was removed in 2010. Make sure to file form 8606 for the nondeductible Traditional IRA contribution with your 2010 taxes!

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Kevin December 29, 2010 at 12:55 pm

When is the deadline for converting from traditional IRA to a Roth? year end or April 15?

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Elaine Ferrara December 23, 2010 at 11:35 am

Hello,
I am interested in purchasing a Roth Ira. I am 58 years old and receive a civil service pension, which is taxable and SSD. Am I eligible to purchase one this late? Also, do I pay taxes now or later? Please reply as soon as possible. thanks

Elaine Ferrara

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andys2i December 24, 2010 at 9:28 am

No age limit to purchase a Roth IRA. See this article for how to open an IRA account: http://www.savingtoinvest.com/2010/07/how-and-where-to-open-a-traditional-or-roth-ira-account-and-factors-to-keep-in-mind.html

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Doug Browne November 8, 2010 at 9:53 pm

Question about Roth contribution.
Income makes us eligible to contribute, however my wife doesn’t work.
Can we each contribute $5000 to separate Roths?
DB

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Mark Hersey February 3, 2011 at 4:54 pm

Check into spousal IRAs.

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Jeff July 23, 2010 at 11:53 am

A recent Fidelity Investments study (http://www.prnewswire.com/mnr/fidelity/40306/) found that many investors are still struggling to understand the fundamental benefits of a Roth IRA. Additionally, 88 percent are unaware of the 2010 Roth IRA conversion opportunity.

Fidelity believes that most investors should consider having a Roth IRA as part of their overall retirement plan to help minimize taxes and maximize retirement savings. However, the study finds that although more than half (56 percent) of those surveyed say they are confident they understand the benefits of a Roth IRA, their actual knowledge of features and the federal tax-free growth and withdrawal advantages is lacking. For example, many investors did not correctly answer when asked if:

— Contributions are tax deductible (28 percent answered incorrectly) or if investment gains and income are tax free (20 percent) and can be withdrawn tax free after age 59-1/2 (32 percent)
— Withdrawals need to be made starting at age 70-1/2 (66 percent) or if contributions may continue after age 70-1/2 (70 percent)
— Money may be used for a first-time home purchase (57 percent) or college education (62 percent)

“This survey highlights that many investors first need to understand the benefits of a Roth IRA before they can consider if a conversion is right for them,” said Chris McDermott, vice president, Fidelity Investments. “It also reinforces how important investor education will be in helping individuals to evaluate their specific needs around this complex decision.”

When examining the potential future actions of investors, many say they are willing to investigate a Roth IRA conversion for a 401(k) left with a former employer or other IRA (55 percent), such as a Traditional, SEP or SIMPLE IRA. However, when asked about the biggest obstacles to converting, respondents cite their lack of understanding as the most significant barrier, but also listed others. For example:
— Approximately one third of investors indicate they do not understand a Roth IRA conversion’s tax implications (34 percent) or the tax structure of a Roth IRA itself (30 percent)
— Nearly a third (30 percent) say their balances are too small for a conversion or they lack sufficient funds (27 percent) to cover the conversion tax costs
— One in five (20 percent) do not believe a Roth IRA fits their needs

“Considering that a Roth IRA offers tax-free withdrawals and growth potential, analysis done by Fidelity indicates that most investors should consider having one as part of their overall retirement plan to help minimize taxes and maximize retirement savings,” said McDermott. “We believe if investors have at least 10 years before making withdrawals, anticipate a higher tax rate in retirement or plan to leave savings to heirs, they should consider a conversion.”

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