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Author: MercyMe One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Breaking Roth AGI Limits Date: 12/6/1998 12:39 AM
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Hi Everyone,

Because I have always had an employer-funded pension plan, I was always told that I did not qualify for regular IRA deductions.

Now, with the Roth IRA, it appears that my new wife and I (I'm 34, by the way) could finally start a retirement-specific account. But I have one major question.

It says that the Joint-filer AGI limit is 150K, with the phase out being 150-160K. While we don't currently make quite that much, it shouldn't be more than 2 or 3 years before our AGI passes those limits.

What happens when people make any number of years of contributions to a Roth IRA, but eventually pass through the AGI limits? I would assume that no contributions can be made in any year where they have too much AGI, but what about their previous contributions? Do they continue to be treated as before, until they are finally withdrawn according to the plan?

And what about cases where a person or couple's AGI breaks the limit sporadically, changing from year to year. That could be the case with us.

I'd love any help on this.


Thanks,

MercyMe

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6789 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/6/1998 10:27 AM
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[[Hi Everyone,]]

Hi Mercy...

[[ Because I have always had an employer-funded pension plan, I was always told that I did not
qualify for regular IRA deductions.]]

That may not be entirely true. The deductibility of your regular IRA was contingent on your AGI if you were a participant in a qualified pension/profit sharing plan with your employer. So, depending upon your income, is is possible that some, or all, of your regular IRA contributions may have been deductible. I have a post in the Taxes FAQ area (archives section) that deals with the AGI limitations and IRA deduction issues. You might want to check it out.

[[ Now, with the Roth IRA, it appears that my new wife and I (I'm 34, by the way) could finally start
a retirement-specific account. But I have one major question.]]

OK...I'll see if I can give you an answer.

[[ It says that the Joint-filer AGI limit is 150K, with the phase out being 150-160K. While we don't
currently make quite that much, it shouldn't be more than 2 or 3 years before our AGI passes those
limits.]]

OK...

[[ What happens when people make any number of years of contributions to a Roth IRA, but
eventually pass through the AGI limits?]]

You would simply lose the ability to make any future Roth IRA contributions. It would not impact any Roth IRA contribution that you may have made in the past.

[[ I would assume that no contributions can be made in any
year where they have too much AGI, but what about their previous contributions? Do they
continue to be treated as before, until they are finally withdrawn according to the plan? ]]

Yup. Your current (or future) ability to make Roth IRA contributions will not impact your prior contributions. But those prior contributions will still fall under the Roth IRA rules, and can be tax free if taken out in a qualified distribution in later years. I'm currently running a series of informative posts regarding the Roth IRA in the Taxes FAQ area. You might want to check it out for more information on Roth IRAs.

[[ And what about cases where a person or couple's AGI breaks the limit sporadically, changing
from year to year. That could be the case with us.]]

Then your ability to make a Roth IRA contribution would also be sporadic. In the years that you qualify, you could make the contribution. In the years that your AGI is too high, then you would not be able to make a contribution.

[[ I'd love any help on this.]]

The I hope that you love this post!!!

TMF Taxes
Roy

Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.


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Author: RBrowndog One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6792 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/6/1998 11:08 AM
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Hi Roy:
I'm posting this as an expansion of questioning on this subject.
I just came from an article written by you on qualifying for IRA. It was from a pointer in an article on the foolish four written Dec.4th.
Everything I've read before now told me I qualify for a Roth if I make less than an AGI of $98K. Yes I am single and head of household. Now the article I just came from (went back a couple times to make sure I read it right) said that my AGI must be under $40K for any contribution. Is this right? If so I'm making a big mistake as I've started a Roth for 98 already......
Thanks....RBrowndog



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Author: MercyMe One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6797 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/6/1998 2:12 PM
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Roy,

A big THANK YOU to you. Very clear and informative.

I'll tell you, the Motley Fool site and the wonderful people who help out here are a resource worth 10 times the price. . . wait a minute. Well, you know what I mean ;)

By the way, I did look at some of the other posts you mentioned in your reply. Thanks for the tip.

So, now I'm off to start a Roth, since my wife and I will qualify this year! By the way, based on everything I know at this point, I think I'll set it up with Waterhouse and I'll buy the RP4. Any specific opinions about that?

Thanks again for your help!

MercyMe

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Author: RBrowndog One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6802 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/6/1998 3:39 PM
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Please excuse me as I didn't mention that I do participate in a 401k.

Hi Roy:
I'm posting this as an expansion of questioning on this subject.
I just came from an article written by you on qualifying for IRA. It was from a
pointer in an article on the foolish four written Dec.4th.
Everything I've read before now told me I qualify for a Roth if I make less than
an AGI of $98K. Yes I am single and head of household. Now the article I just
came from (went back a couple times to make sure I read it right) said that my
AGI must be under $40K for any contribution. Is this right? If so I'm making a
big mistake as I've started a Roth for 98 already......
Thanks....RBrowndog

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Author: IvysOwner Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6809 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/7/1998 12:41 AM
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Congratulations on getting everything straightened out.

I recently completed the same tasks, and like you chose Waterhouse to handle the accounts for both me and my wife.

A word of caution: the Waterhouse website is weak compared to my regular broker (Datek). The interface is poorly designed, and clumsy to surf through.

Even though Waterhouse is no-fee and Datek has a fee, I've decided (after a WEEK) that I'm going to switch everything over to Datek or a new contestant soon. It'll cost me $100 to get the stuff out of Waterhouse, but the trading is kinda ugly.

If you plan to buy and then sit on the stocks for 40 years, I suppose it doesn't matter much about the interface. But I'm more impatient (aggressive?) and I have had pretty good luck with Datek.

IO

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Author: MercyMe One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6811 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/7/1998 1:28 AM
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This is for the fellow who kindly e-mailed me about this message. I tried to reply via e-mail, but the reply address was no good.

It's interesting that you would have mailed me on this. Believe it or not, I chose DATEK as my primary broker, same as you. In fact, I actually bought my very first shares of stock this past Friday using them and it couldn't have been simpler!

The reason I want to go with Waterhouse for the IRA's is manifold.

1. As you know, they don't charge a fee.

2. Since I want at least a portion of my total portfolio to be invested in a low trading frequency approach such as RP4 or simple LBTH, I will let that portion fund the IRA's. Therefore, I probably won't be trading very heavily in those accounts.

3. Having 2 online brokers seems to make sense to me. Nice to have a backup if things get ugly. And with Waterhouse, I have a local office to boot.

So, all things considered, it seems to be a good move to me. In any event, I expect that the bulk of my money will be with Datek.

Thanks for the tip, though!

Best,

MercyMe


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6815 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/7/1998 10:51 AM
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[[Hi Roy:]]

Hi there, BrownDoggie...

[[I'm posting this as an expansion of questioning on this subject. ]]

Ok...

[[ I just came from an article written by you on qualifying for IRA. It was from a pointer in an article
on the foolish four written Dec.4th.
Everything I've read before now told me I qualify for a Roth if I make less than an AGI of $98K.]]

Well, you certainly qualify to make a conversion of a regular IRA to a Roth IRA. For conversions, the AGI limitation is $100k.

But regarding contributions, the AGI limitations are a bit different.

[[ Yes I am single and head of household.]]

Sorry, Doggie...but from a filing status standpoint you can't be both. You are either one or the other. But the key point is that this really makes no difference in the overall scheme of things when reviewing the AGI contribution limitations.

[[ Now the article I just came from (went back a couple
times to make sure I read it right) said that my AGI must be under $40K for any contribution. Is
this right?]]

Nope. I think that you may have been looking at the REGULAR IRA deduction issues. Not the Roth IRA. Last week in the Taxes FAQ area I began my posts on the Roth IRA. You might go back and check it out for some additional details.

But, in the meantime, here is a re-post of that article:

And now for the bad news -- some individuals may not be eligible for the Roth IRA. Limitations based upon your tax filing status and Adjusted Gross Income (AGI) are listed below:

Single and Head of Household Filers:
Income: AGI = $95,000 or less
Rule: $2,000 contribution to a Roth IRA is fully allowable (assuming that the earned income rules are met).

When AGI rises above $110,000, no Roth IRA contribution is allowable. Between the $95,000 and $110,000 "phase out" range, only a partial Roth IRA contribution will be allowed.

Joint Filers:
Income: AGI = $150,000 or less
Rule: $2,000 contribution to a Roth IRA for each of the joint filers is fully allowable (again, assuming that the earned income rules are met).

When AGI rises above $160,000, no Roth IRA contribution is allowable. Between the $150,000 and $160,000 "phase out" range, only a partial Roth IRA contribution will be allowed.

Married filing separately
For married persons filing separate returns, the AGI limitation is so severe as to virtually prohibit a Roth IRA contribution. For married/separate filers, the "phase out" range is between $0 and $10,000. This means that a married/separate filer will never be able to take a full Roth IRA contribution, and when AGI rises above $10,000, no Roth IRA contribution will be allowed whatsoever.

What the Heck is a "Phase Out Range"?

If you fall into the "phase out" ranges listed above, your Roth IRA contribution is limited on a pro-rata basis, depending upon how far your AGI moves into the phase out range.

Example: Jill, a single person, has AGI of $105,000, has earned income of at least $2,000, and is not a participant in her employer's pension/profit sharing plan. Since Jill is two-thirds into the phase out range, she is only allowed a one-third contribution to her Roth IRA. Therefore, her maximum Roth IRA contribution would amount to $666.67 (which she can round up to $670). Since her Roth IRA was limited, can she make a regular IRA contribution? Sure…in the amount of $1,330. Will that IRA contribution be deductible? That will depend upon Jill's circumstances. In our example, Jill isn't a participant in her employer's pension/profit sharing plan, so her regular IRA would be fully deductible. If she were a participant in her employers pension plan, her deductible IRA contribution would also be limited. If you are unsure about the regular IRA deduction issues, check out my post on that very issue in the Taxes FAQ area.

[[If so I'm making a big mistake as I've started a Roth for 98 already......]]

I don't know about a BIG mistake...but your Roth IRA contribution may be limited based upon your post and the AGI limits noted above. If there is any way that you can reduce your AGI under the limitation, it may be in your best interest to do so.

Hope this helps...
TMF Taxes
Roy

Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6820 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/7/1998 11:10 AM
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[[Roy,]]

Mercy...

[[ A big THANK YOU to you. Very clear and informative.]]

And a big thank YOU for your questions...

[[ I'll tell you, the Motley Fool site and the wonderful people who help out here are a resource worth
10 times the price. . . wait a minute. Well, you know what I mean ;)]]

I got it! And you kind words are much appreciated. Generally, information is worth just what you pay for it. We like to think that the Fool site provides just a little bit more than that.

[[ By the way, I did look at some of the other posts you mentioned in your reply. Thanks for the tip.]]

Absolutely. Make sure to "bookmark" the Taxes FAQ area into your favorite places, and read my weekly tax post. It'll keep you up to date with respect to taxes and investing issues.

[[ So, now I'm off to start a Roth, since my wife and I will qualify this year! By the way, based on
everything I know at this point, I think I'll set it up with Waterhouse and I'll buy the RP4. Any
specific opinions about that?]]

Now you're out of my league. Perhpas some other Fools could give you their thoughts on this issue.

[[ Thanks again for your help!]]

Hope you continue to hand around the folder.

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6825 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/7/1998 11:34 AM
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[[Please excuse me as I didn't mention that I do participate in a 401k.]]

My previous answer still controls. Your ability to make Roth IRA contributions are based upon AGI...not your participation in an employer sponsored pension/profit sharing/deferred compensation plans.

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6830 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/7/1998 12:04 PM
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[[If you plan to buy and then sit on the stocks for 40 years, I suppose it doesn't matter much about
the interface. But I'm more impatient (aggressive?) and I have had pretty good luck with Datek.]]

Thanks for your thoughts, IO...

Anybody else??

TMF Taxes
Roy

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Author: wiedmann Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6869 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/8/1998 1:44 AM
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2. Since I want at least a portion of my total portfolio to be invested in a low trading frequency approach such as RP4 or simple LBTH, I will let that portion fund the IRA's. Therefore, I probably won't be trading very heavily in those accounts.

A quick question. Wouldn't it be better from a tax optimization perspective to do the active trading in your IRA account (no taxes) and do your low trading frequency investing outside (reducing the taxes you pay for the investing outside your IRA)?

-Christian


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6883 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/8/1998 9:51 AM
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[[2. Since I want at least a portion of my total portfolio to be invested in a low trading
frequency approach such as RP4 or simple LBTH, I will let that portion fund the IRA's.
Therefore, I probably won't be trading very heavily in those accounts.

A quick question. Wouldn't it be better from a tax optimization perspective to do the active trading
in your IRA account (no taxes) and do your low trading frequency investing outside (reducing the
taxes you pay for the investing outside your IRA)?]]

Basically yes, Christian. That was the point that I was trying to bring about in my post. You would keep your trading gains (short term) within your IRA (or other tax deferred account) where the capital gains issues would make no difference. And you would keep your long term capital gains (with preferred tax treatment) in your taxable account in order to generate the greatest gains (and least taxes).

Thanks for helping me make my point, Christian.

TMF Taxes
Roy

Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.


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Author: RBrowndog One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6914 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/8/1998 8:02 PM
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Thank you Roy:
<<Hi there, BrownDoggie...
<<Nope. I think that you may have been looking at the <<REGULAR IRA deduction issues.

I couldn't get this off my mind. I have now gone back and re-read everything. I think I just allowed myself to get emotional when I saw that 30-40k in that one article (referring to DEDUCTIBLE contributions to an IRA). I shouldn't have let myself get emotional and "very very wise"...hehe

<<I don't know about a BIG mistake...but your Roth IRA <<contribution may be limited based upon your post and <<the AGI limits noted above.

BTW I'm very safe on qualifying. I should only make 80 something K this year.
Thanks Again
RBrowndog


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6939 of 121061
Subject: Re: Breaking Roth AGI Limits Date: 12/9/1998 8:59 AM
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[[<<Nope. I think that you may have been looking at the <<REGULAR IRA deduction issues.

I couldn't get this off my mind. I have now gone back and re-read everything. I think I just allowed
myself to get emotional when I saw that 30-40k in that one article (referring to DEDUCTIBLE
contributions to an IRA). I shouldn't have let myself get emotional and "very very wise"...hehe

<<I don't know about a BIG mistake...but your Roth IRA <<contribution may be limited based
upon your post and <<the AGI limits noted above.

BTW I'm very safe on qualifying. I should only make 80 something K this year. ]]

Kewel, BrownDoggie...
Glad you got another opinion...
TMF Taxes
Roy

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