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How does the $95,000 income limit for Roth IRA contributions get calculated?

My specific problem is that my gross income may be over 95K this year (depending on bonuses and raises). However, I am making a 10K contribution to my 401K at work. Does this 10K get subracted from my Roth IRA income limit?

If this is going to be a problem, I already made my 2005 Roth contriubtion of 4K. What happens - does my bank make me put the 4K into a traditional IRA?

Thanks
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>> My specific problem is that my gross income may be over 95K this year (depending on bonuses and raises). However, I am making a 10K contribution to my 401K at work. Does this 10K get subracted from my Roth IRA income limit? <<

Yes. Your 401K contributions reduce your W-2 wages. If you grossed $100K and you contribute $14,000 (maximum for 2005) to a 401K plan, your modified AGI for this purpose (absent other considerations) is $86,000.

It's interesting, really, that when you're near the phaseout, your ability to fund a Roth depends on how much you can fund a 401K plan; in that case, the more you put into a 401K, the more you can probably put into a Roth as well.

>> If this is going to be a problem, I already made my 2005 Roth contriubtion of 4K. What happens - does my bank make me put the 4K into a traditional IRA? <<

It's not a problem for you if 401K contributions will keep you below the $95,000 level, but if it were a problem, yes, you would have to recharacterize your Roth into a traditional (and probably non-deductible) IRA. Personally, with dividends and long-term capital gains at a lower tax rate, I'd pull the contributions out (which you can always do without tax consequence) and invest in a taxable account -- unless you thought your income would be low enough to convert the traditional non-deductible IRA to a Roth at some point in the future.

#29
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How does the $95,000 income limit for Roth IRA contributions get calculated?

My specific problem is that my gross income may be over 95K this year (depending on bonuses and raises). However, I am making a 10K contribution to my 401K at work. Does this 10K get subracted from my Roth IRA income limit?

If this is going to be a problem, I already made my 2005 Roth contriubtion of 4K. What happens - does my bank make me put the 4K into a traditional IRA?


The calculations for the $95K limit can be found in Publication 590. It is based on your modified adjusted gross income. You would take your AGI on line 37 of your 1040 and then add in certain deductions and exclusions. The details are on page 54 of Pub. 590. Your 401k contribution will lower your AGI.

If your MAGI exceeds the income limits for a Roth contribution, you can recharacterize it to a traditional IRA. Since you can wait until April of next year to recharacterize, you could wait until your file your 2005 tax return to see if you really did exceed the income limits.

http://www.irs.gov/pub/irs-pdf/p590.pdf

IF
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Personally, with dividends and long-term capital gains at a lower tax rate, I'd pull the contributions out (which you can always do without tax consequence) and invest in a taxable account

I would point out that you confirm that you indeed do exceed the income limits on the Roth IRA. If you pull the contribution out today and you find out that your MAGI really didn't exceed it when you do your 2005 tax return, you can't say oops and try to put the contribution back in.

IF
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>> I would point out that you confirm that you indeed do exceed the income limits on the Roth IRA. If you pull the contribution out today and you find out that your MAGI really didn't exceed it when you do your 2005 tax return, you can't say oops and try to put the contribution back in. <<

Well, true. I wouldn't do it until I *knew* I was going to exceed the limits and there was no realistic way I could reduce my MAGI.

#29
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Great, I've maxed out my 401K and am safe for now.

Not to push it, but what about other pre-tax deductions like

- FlexPlan for medical expenses
- Dental
- Medical


Thanks
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Not to push it, but what about other pre-tax deductions like

- FlexPlan for medical expenses
- Dental
- Medical


Overall, the only reason I know of not to pretax these would be the last X years of employment if those are your highest salary years and you will receive a pension based on that.

For the pre-tax for medical expenses, there's no reason not to do fairly predictable expenses and you don't actually have to use every cent to come out ahead(although with OTC drugs and a few other things, it's often easy to use it up if need be.)

rad
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ROTH limits are a phaseout that begins at 95K for a single taxpayer.


Rememeber Roth contributions can always be withdrawn w/o penalty.

buzman
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I would point out that you confirm that you indeed do exceed the income limits on the Roth IRA. If you pull the contribution out today and you find out that your MAGI really didn't exceed it when you do your 2005 tax return, you can't say oops and try to put the contribution back in.

Are you sure about that?

If you contribute, then pull out your contributions and corresponding earnings before the deadline for contributing, won't it be treated as if it were never contributed, except for income taxes on the earnings pulled out? If so, wouldn't you be able to contribute again before the deadline for contributing?

I think I would suggest leaving the Year 2005 contributions in until one finds out one cannot contribute, and then decide whether to:

1. recharacterize contribution to a Traditional IRA, or

2. withdraw the contributions and corresponding earnings (the earnings become taxable for the year the contribution was for).
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Are you sure about that?

If you contribute, then pull out your contributions and corresponding earnings before the deadline for contributing, won't it be treated as if it were never contributed, except for income taxes on the earnings pulled out? If so, wouldn't you be able to contribute again before the deadline for contributing?


You are correct. See page 58 of Publication 590.

IF
learn something new everyday

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