Preparing to hit the Roth limit

[$ hoarder]

We do best when we set aside money direct from our checks--otherwise we spend it. In the next few years we will enter the Roth "phase out" zone and I am not thrilled about waiting until the end of the year to see if we make it under the limit to write a big check. Our advisor suggested this option instead of putting it away monthly so we don't have to take it out at the end of the year. Has anyone else had this situation? How did you handle it? Did you accurately predict your income before the end of the year?

[corn18]

I dump 1/12 into a regular IRA each month and then do a conversion at the end of the year to a Roth. I have no other IRA's so no tax implications. If you have IRA's that you contributed pre-tax dollars to, this could be a very bad approach. But it works great for me.

Tom

[Goldy]

We have bumped into the phase out zone in the past and it was a pain, more than I had expected it to be. What I do now is contribute 250 a month so that at the end I have a few thousand left to contribute if we come in under the limit. It's working for now but next year we might be close to the top end so I think I'll hold off on all contributions until taxes are done.

Can you lower your taxable income? Is your 401k maxed? Are you in a HSA plan? Tweaking these things has given us a couple extra years at max contributions.

[Reggie]

Set up an IRA and just do a conversion to ROTH. You don't have to wait at all you can do it the next day on Vanguard and Fidelity. You also don't have to worry about last minute calculations of income. I know we will go over so it's just easier and less stressful to have it all set up. Takes about 10 minutes.

[corn18]

Set up an IRA and just do a conversion to ROTH. You don't have to wait at all you can do it the next day on Vanguard and Fidelity. You also don't have to worry about last minute calculations of income. I know we will go over so it's just easier and less stressful to have it all set up. Takes about 10 minutes.

Be very, very careful with this approach because any pre-tax IRA contributions you have made to date will be taxable immediately. The percentage is complicated and requires some research, but this could cost you a LOT of money if done incorrectly.

Read this page:

http://taxes.about.com/od/retirementtaxes/a/Roth-IRA-Conversions_2.htm

This makes as much sense to me as quantum physics.

Good luck.

Tom

[Petunia 100]

If it is the same tax year, you don't convert, you re-characterize your contribution. You just call your custodian and say "I wish to re-characterize my 2014 contribution". Or, "I wish to re-characterize 3k of my 2014 contribution". Easy peazy.

[Reggie]

Be very, very careful with this approach because any pre-tax IRA contributions you have made to date will be taxable immediately. The percentage is complicated and requires some research, but this could cost you a LOT of money if done incorrectly.

Read this page:

http://taxes.about.com/od/retirementtaxes/a/Roth-IRA-Conversions_2.htm

This makes as much sense to me as quantum physics.

Good luck.

Tom

Contributions that you are making are after tax, you just cant claim the deduction.....but you wouldnt do that because youve converted them to ROTH accounts.

[feh]

We do best when we set aside money direct from our checks--otherwise we spend it.

This is the root of your problem. I suggest you address your spending rather than using accounting techniques to try to hide the money.

[autoxer]

Contributions that you are making are after tax, you just cant claim the deduction.....but you wouldnt do that because youve converted them to ROTH accounts.

But the taxes get messy if you have a traditional IRA account balance. They will treat it as partially converting some of the previously deductible funds, which will raise your current tax bill.

We do best when we set aside money direct from our checks--otherwise we spend it. In the next few years we will enter the Roth "phase out" zone and I am not thrilled about waiting until the end of the year to see if we make it under the limit to write a big check. Our advisor suggested this option instead of putting it away monthly so we don't have to take it out at the end of the year. Has anyone else had this situation? How did you handle it? Did you accurately predict your income before the end of the year?

Taking it back out at the end of the year if you are over the limit is no big deal. I did this one year and then just paid the tax on the gains, like it was in a taxable account.

Your other option would be just to invest it in a regular account and then move it into the ROTH at the end of the year when you know what your total income will be.

Are there other ways that you can lower your AGI to keep yourself under the phase out? Increase 401k contributions? etc.

[Reggie]

To be very specific, open IRA account exclusively for ROTH conversions. Pick and buy funds. Open ROTH IRA account. (I wait a day or two). Convert funds from IRA to ROTH account. It really couldn't be easier.

[autoxer]

To be very specific, open IRA account exclusively for ROTH conversions. Pick and buy funds. Open ROTH IRA account. (I wait a day or two). Convert funds from IRA to ROTH account. It really couldn't be easier.

And the final step is to pay tax on the conversion. If you have other funds in traditional IRA accounts that were deducted from previous years tax returns, then this conversion will increase your tax bill.

[corn18]

And the final step is to pay tax on the conversion. If you have other funds in traditional IRA accounts that were deducted from previous years tax returns, then this conversion will increase your tax bill.

Reggie isn't getting that part. If you have $500,000 in pre-tax IRA's and do a Roth conversion on $11,000 of post tax IRA contributions, you could end up paying a lot of tax. A LOT of tax.