Roth IRA questions

[rrs2143]

Hi all.

I was hoping for some helpful guidance and advice for a couple of Roth IRA questions. Any feedback is much appreciated and I apologize, in advance, for the length of this posting.

My first question pertains to the MAGI for Roth IRA contributions. I know about the $107k - $122k single-filer limits (applicable to me) for full and partial contributions for 2011 but I was unsure how MAGI is calculated. I've recently graduated from grad school and I will begin work in November, where my annual salary will likely exceed the $122k limit. However, for 2011, I will only earn income from November 1 to December 31. Based on just these 2 months of work in 2011, may I contribute to a Roth IRA for 2011 or will my MAGI be calculated based on my annual salary?

Secondly, if I choose to convert a traditional IRA into a Roth IRA, at which rate will the conversion be taxed? Here is a little more info.: I fed into a 401(k) at a job before I went back to school in ‘08. I was making approx. $40k/yr. at that job and saved approx. $3k in the 401(k). Since I’ve been in school, I’ve had $0 income, apart from 2 months of work last summer. My tax bracket will be determined by the amount of income I earn from Nov. 1 to Dec. 31 of this year from my new job. Based this information, at what rate would a potential traditional IRA to Roth IRA conversion be taxed at—the rate of the income I earn from Nov. 1 to Dec. 31st, the rate at which I last fed my 401(k), or some other calculated rate? I ask because I expect my tax rate from Nov. onwards to be much higher than any point prior to when I went back to school.

Again, any guidance will be much appreciated. Thank you.

[Petunia 100]

First question, individuals pay tax on a cash basis. So your MAGI is based on what you actually receive during the year. It doesn't matter what your annual salary is.

Second question, if your gross for the year is 20k salary + 3k Roth conversion, you will be in the 10% bracket. Converting is a very good idea.

[rrs2143]

Based on your reply to the second question, will a conversion this year impact what amount I can contribute to my Roth IRA this year as well. Say, for example, I choose to convert the $3k IRA into a Roth IRA so that the Roth IRA has $2,700 in it after the conversion. Will I have to reduce the my maximum Roth IRA contribution this year by that $2,700? So instead of making a $5k Roth IRA contribution for 2011, I can only make a $2,300 contribution?

[Petunia 100]

Converting will not effect your ability to contribute. You may still make a full 5k contribution for 2011.