No. of Recommendations: 0
Hi folks. I am trying to decide which IRA would be best for the family and I am a bit confused on the Roth side. Currently my wife and mine's combined income is right around the $100K mark. Right now a Roth feels like the best option for us but one question I have is what happens later on when we make more money. We are both looking at raises coming up within the next 3-4 years that will put us well over the $150K limit for Roth contributions. Knowing this, would it be better to go with a traditional IRA rather than a Roth? This has me perplexed as to my gameplan. Thanks to all for any advice!!!
Print the post Back To Top
No. of Recommendations: 1
Hi folks. I am trying to decide which IRA would be best for the family and I am a bit confused on the Roth side. Currently my wife and mine's combined income is right around the $100K mark. Right now a Roth feels like the best option for us but one question I have is what happens later on when we make more money. We are both looking at raises coming up within the next 3-4 years that will put us well over the $150K limit for Roth contributions. Knowing this, would it be better to go with a traditional IRA rather than a Roth? This has me perplexed as to my gameplan. Thanks to all for any advice!!!

The income limits for Roths are now indexed to inflation. For MFJ, the 2007 MAGI limits are:

Up to $156k - full contributions allowed
$156k - $166k - pro-rated contributions allowed
Over $166k - contributions not allowed

Additionally, the income limits are on your Modified AGI (MAGI). MAGI calculations are covered in IRS Publication 590: http://www.irs.gov/pub/irs-pdf/p590.pdf They allow you to subtract things like your 401(k) contributions and HSA contributions before you determine your eligibility. So a couple MFJ who each max out their 401(k)s @ $15,500 and each have an individual HSA @ $2850 in 2007 could have an AGI of $192,700 before even reaching the phase-out range, and could make $202,700 before being completely ineligble to contribute.

So you probably won't catch up quite as fast as you think.

Additionally, starting in 2010, the income cap of $100k on Roth conversions is supposed to be lifted (assuming Congress doesn't change the law). So you could potentially contribute to a non-deductible IRA and then immediately convert to a Roth.

As far as what happens if you are unable to contribute to a Roth anymore - your money will just stay in the Roth account, and you manage it just like any other account - you just won't be able to contribute to it anymore. You don't have to remove it if you are ineligible to contribute anymore.

AJ
Print the post Back To Top
No. of Recommendations: 0
Thanks AJ. So lets say we open a Roth and are contributing for lets say 10 years and in that 10th year we surpass the $150K mark. Can we then roll it all into a traditional IRA to continue contributions? Forgive my questions if they seem elementary. I am a pilot by trade, not a finacial anything.
Print the post Back To Top
No. of Recommendations: 1
Thanks AJ.

You're welcome.

So lets say we open a Roth and are contributing for lets say 10 years and in that 10th year we surpass the $150K mark. Can we then roll it all into a traditional IRA to continue contributions?

Nope - you just leave it in the Roth. It will grow as a Roth and you won't have to pay taxes on any of the withdrawals (again, assuming that Congress doesn't change the law).

Forgive my questions if they seem elementary. I am a pilot by trade, not a finacial anything.

Better to ask questions and learn than to make mistakes. And this is a great place to learn.

AJ
Print the post Back To Top
No. of Recommendations: 0
To add one comment to AJ's post,

While you are filing taxes as a couple, you each will have an IRA account. So for 2007, you open an IRA account (Roth or traditional) and contribute up to $4000, and your wife opens an IRA (Roth or traditional) and contributes up to $4000. Next year, the contribution limit bumps up to $5000. Again, each of you can contribute that amount to their respective IRA accounts.



Hohum
Print the post Back To Top
No. of Recommendations: 0
Oh so theoretically we can BOTH open our own respective accounts and contribute $4,000 to each one thus giving an advantage while we are under the max contribution mark.

So if we reach that magical $150K income mark and can't contribute any longer, whats stopping us from withdrawing the whole amount tax free from the Roth, placing it in a regular bank account, then using that same money to then open a traditional IRA?
Print the post Back To Top
No. of Recommendations: 0
So if we reach that magical $150K income mark and can't contribute any longer, whats stopping us from withdrawing the whole amount tax free from the Roth, placing it in a regular bank account, then using that same money to then open a traditional IRA?

For Roth IRAs, your contributions are after-tax and your withdrawals in retirement are tax-free. For non-deductible traditional IRAs, your contributions are after-tax and your withdrawals in retirement are taxed at your income rate. There is no reason to try to convert tax-free money into taxable income.

You can have more than one IRA account. Once you exceed the income limits, you can leave your Roth IRA where it is at and open a non-deductible traditional IRA.

IF
Print the post Back To Top
No. of Recommendations: 13
So if we reach that magical $150K income mark and can't contribute any longer, whats stopping us from withdrawing the whole amount tax free from the Roth, placing it in a regular bank account, then using that same money to then open a traditional IRA?

The sense God gave a goose.

Assuming you could roll a Roth into a traditional (you can't), what sentinent person would want to convert tax-free earnings into taxable earnings?

Phil
Print the post Back To Top
No. of Recommendations: 2
Oh so theoretically we can BOTH open our own respective accounts and contribute $4,000 to each one thus giving an advantage while we are under the max contribution mark.

Correct.

So if we reach that magical $150K income mark and can't contribute any longer, whats stopping us from withdrawing the whole amount tax free from the Roth, placing it in a regular bank account, then using that same money to then open a traditional IRA?

Ummm. The tax laws would be stopping you. Or at least your desire to avoid paying unnecessary taxes.

To take unrestricted tax-free withdrawals from a Roth IRA, you need to be over 59 1/2 AND the Roth IRA needs to be open for at least 5 years. If you don't meet those requirements, any earnings you withdraw will be taxed and subject to a 10% premature withdrawal penalty on top of that.

As has already been stated, once you have contributed to the Roth IRA, you can just leave the money there. Going over the limit for contributions some time in the future has no effect on the money already properly in the Roth.

So should you get over that limit, you could start making annual contributions to a traditional IRA instead.

--Peter
Print the post Back To Top