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Author: JLMoran Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120820  
Subject: Roth IRA AGI Cutoff Reached Soon Date: 12/10/1999 7:33 AM
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OK, I've read all the postings that explain when you can no longer contribute to a Roth IRA. I understand the phase-out thing when you go over the AGI limit. But what happens when you've been contributing to a Roth IRA and your AGI then goes over the limit? And does AGI factor in the deduction for contributions to a 401(k) plan?

If you can't make any more contributions to a Roth IRA after that limit, what's the point of having it?

Real world for-instance... my wife (who's company STILL -- after a year of employment -- has not enrolled her in their 401(k) plan) is contributing to a Roth IRA and putting in the maximum of $2,000 per year. No problem, our AGI isn't yet anywhere near the maximum.

But I just got a new job with a hefty raise. I'll be contributing the maximum (15% pre-tax) to my new 401(k) plan (and rolling over my old 401(k) money into a traditional IRA that I'll manage myself, thank you very much ;-D). Going just on my new base salary and bonuses, plus my wife's salary, we'll probably hit that 150K limit within the next couple of years. Or will it take longer than that, because the 401(k) contributions will knock a few thousand each year off of my AGI?

What does my wife do when we hit the limit? She can't contribute to the Roth any more at that point, so it's just going to sit there. Can she convert it to a regular IRA so she can keep making contributions? Or does she simply have to "let it ride" and get by on whatever compounding will happen afterwards?

Thanks in advance for the help! :-)
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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22808 of 120820
Subject: Re: Roth IRA AGI Cutoff Reached Soon Date: 12/10/1999 1:48 PM
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JLMoran writes (in part):

What does my wife do when we hit the limit? She can't contribute to the Roth any more at that point, so it's just going to sit there. Can she convert it to a regular IRA so she can keep making contributions? Or does she simply have to "let it ride" and get by on whatever compounding will happen afterwards?

I reply:

She need not convert the Roth to a regular IRA to keep making contributions. All she needs to do is make her later contributions (which will not be deductible) to a regular IRA. If your income ever drops below $100,000 (or the law changes), you'll even be able to convert the regular IRA to a Roth, paying taxes only on the earnings (since the regular IRA will be non-deductible). In the meantime, why not let the Roth ride? --Bob

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Author: JLMoran Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22818 of 120820
Subject: Re: Roth IRA AGI Cutoff Reached Soon Date: 12/10/1999 3:09 PM
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Bob writes (in part):

She need not convert the Roth to a regular IRA to keep making contributions. All she needs to do is make her later contributions (which will not be deductible) to a regular IRA.

I reply:

Bob, thanks. But can she still take the Roth IRA money tax-free when she hits retirement, or does she now have to pay tax on it like a regular IRA? I guess that's my real concern -- does a Roth IRA keep that special tax status even after you've gone over the AGI limit? If not, there's not much point in investing in one if you know your AGI will eventually grow that much.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22819 of 120820
Subject: Re: Roth IRA AGI Cutoff Reached Soon Date: 12/10/1999 3:36 PM
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JLMoran:

<<<<Bob writes (in part):

She need not convert the Roth to a regular IRA to keep making contributions. All she needs to do is make her later contributions (which will not be deductible) to a regular IRA.>>>>

"JLMoran replies:

Bob, thanks. But can she still take the Roth IRA money tax-free when she hits retirement, or does she now have to pay tax on it like a regular IRA? I guess that's my real concern -- does a Roth IRA keep that special tax status even after you've gone over the AGI limit? If not, there's not much point in investing in one if you know your AGI will eventually grow that much."


Once a Roth, always a Roth, at least until Congress meddle with the rules. IOW, going over the AGI does not change the character of an existing Roth IRA, but all the usual withdrawal rules apply --- thus, under certain circumstances, early withdrawals from a Roth can lead to the payment of income taxes on earnings.

Hope this helps. Regards, JAFO


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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22820 of 120820
Subject: Re: Roth IRA AGI Cutoff Reached Soon Date: 12/10/1999 3:46 PM
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JLMoran writes (in part):

But can she still take the Roth IRA money tax-free when she hits retirement, or does she now have to pay tax on it like a regular IRA? I guess that's my real concern -- does a Roth IRA keep that special tax status even after you've gone over the AGI limit?

I reply:

Qualified withdrawals from the Roth IRA are tax-free no matter what your AGI is in the year of withdrawal. I'm in much the same situation as are you; my Roth eligibility will soon expire, but I figure I might as well sock away as much as possible tax-free. --Bob

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Author: JLMoran Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22929 of 120820
Subject: Re: Roth IRA AGI Cutoff Reached Soon Date: 12/12/1999 8:26 AM
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Bob and JAFO, thanks a lot for clarifying that for me. It's good to know that the Roth isn't rigged to penalize people who actually manage to live out the American dream and make some money during their lifetime. :-)

One last question -- Is the AGI computed after pre-tax 401(k) contributions? Or does the IRS simply count all earnings, whether they were put away in a 401(k) or not? And do deductions (like mortgage interest) help with that as well?

In this new position I'm going to, I can contribute up to 15% of my income into the company's 401(k). I plan on putting that whole 15% away from day 1, so that should put a very nice dent in my AGI (at least up to whatever the year 2000 contribution limit is).

I also purchased a house a few months ago, so next year I'll have a full year of deductible mortgage interest and property taxes.

If I can use these to reduce my AGI for Roth contribution purposes, then that will delay the cutoff for a few years at least.

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 22954 of 120820
Subject: Re: Roth IRA AGI Cutoff Reached Soon Date: 12/12/1999 7:48 PM
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JLMoran writes (in part):

Is the AGI computed after pre-tax 401(k) contributions? Or does the IRS simply count all earnings, whether they were put away in a 401(k) or not? And do deductions (like mortgage interest) help with that as well?

I reply:

AGI is computed after 401(k) contributions, but before itemized deductions, such as mortgage interest. --Bob

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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: 22993 of 120820
Subject: Re: Roth IRA AGI Cutoff Reached Soon Date: 12/13/1999 3:07 PM
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<<Bob and JAFO, thanks a lot for clarifying that for me. It's good to know that the Roth isn't rigged to penalize people who actually manage to live out the American dream and make some money during their lifetime. :-)

One last question -- Is the AGI computed after pre-tax 401(k) contributions? Or does the IRS simply count all earnings, whether they were put away in a 401(k) or not? And do deductions (like mortgage interest) help with that as well?>>

As pointed out in previous posts, it'll generally be your TAXABLE W-2 income that will be used for Roth IRA limitation testing. So your 401k contributions will NOT be used for Roth IRA testing purposes.

You can read more about how Roth IRAs work in MUCH more detail (including how to arrive at "modified" AGI for Roth testing purposes) in my various posts on this issue in the Taxes FAQ area...and also in my new book.

TMF Taxes
Roy



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