Question about Roth income limits

[disneysteve]

I know there are a couple of accountant folks here.

The income limit for contributing to a Roth has never been an issue for us because we've never earned that much but it is remotely possible that we might in 2016 if I switch jobs entirely.

So how does that work exactly? I see that your ability to contribute starts phasing out at $184,000 for a married couple. Is that AGI?

I've always funded our Roths as soon as I had the money free to do so, but I'm thinking that this year I may stretch it out so that I don't end up over-contributing just in case we end up exceeding the income limit. It won't be a problem if I only work part time but if I go full time it will be.

[scfr]

Here's a handy calculator: https://www.tiaa.org/public/products...rs/eligibility

The phaseout window is really narrow. At $184K AGI you can contribute the full amount, but at $194K you are completely ineligible.

Sounds like it might be a good year to wait until you know year-end numbers to contribute.

[Like2Plan]

I've always funded our Roths as soon as I had the money free to do so, but I'm thinking that this year I may stretch it out so that I don't end up over-contributing just in case we end up exceeding the income limit. It won't be a problem if I only work part time but if I go full time it will be.

I can think of a couple of things you could do:
1. You could wait until 2017 (you have up until the federal tax filing deadline to make a contribution) to see if you could fund the Roth directly.

2. You could contribute to a traditional (nondeductible) IRA and then you could convert it to a Roth. There are nuances with this--particularly if you already have a traditional IRA.

[disneysteve]

What happens if I put money in the Roth and then find out we're over the limit? Can I just recharacterize the contribution to a traditional? Or is it more complicated than that?

[scfr]

Does your new employer have a retirement plan that you will be eligible for? Or would you be eligible for it if you went full-time? If you wind up eligible for an employer-sponsored plan, then if you don't qualify for a Roth there's no way you'll qualify for a traditional.

We dance the eligible / not eligible line (more years eligible, but occasionally not). I learned that it's just much easier to wait until I complete our tax return to make contributions.

With so many things up in the air for you this year (total income, PT or FT) my personal recommendation is to just wait. You'll save the money anyway, whether it's in an IRA or a taxable account. If you just sent off a contribution, is there any way you can call and cancel it?

[Like2Plan]

What happens if I put money in the Roth and then find out we're over the limit? Can I just recharacterize the contribution to a traditional? Or is it more complicated than that?

yes, I believe you can.

http://fairmark.com/retirement/roth-accounts/contributions-to-roth-accounts/excess-contributions-to-roth-iras/

[Like2Plan]

..If you wind up eligible for an employer-sponsored plan, then if you don't qualify for a Roth there's no way you'll qualify for a traditional.

We dance the eligible / not eligible line (more years eligible, but occasionally not). I learned that it's just much easier to wait until I complete our tax return to make contributions.

There isn't an income limit on a non-deductible traditional IRA, so that is still an option.

[scfr]

There isn't an income limit on a non-deductible traditional IRA, so that is still an option.

Yes, but you have to track the value of the non-deductible portion of the traditional IRA. Can be done, just a bit of a PITA. I'm in that situation and I stuck the non-deductible portion in a separate fund at Vanguard to keep it separate from the deductible portions. When it's time to start withdrawing, I hope the IRS accepts my explanation that "the money in fund X is the non-deductible portion of the traditional IRA." EDIT: And since those funds are in my husband's traditional IRA (the reason they ended up in there are his "fault" - haha), I worry about him handling it correctly if I die before the funds are withdrawn.

Not the end of the world by any means, just so much easier to wait until the tax return is completed as I've learned. EDIT: And my husband learned ages ago not to run off and stick money somewhere without consulting me first just because some guy who doesn't understand the rules or know our entire financial situation tells him it's a great financial move.

[Like2Plan]

Yes, but you have to track the value of the non-deductible portion of the traditional IRA. Can be done, just a bit of a PITA. I'm in that situation and I stuck the non-deductible portion in a separate fund at Vanguard to keep it separate from the deductible portions. When it's time to start withdrawing, I hope the IRS accepts my explanation that "the money in fund X is the non-deductible portion of the traditional IRA."

Not the end of the world by any means, just so much easier to wait until the tax return is completed.

Yes--you should be tracking your basis. I believe it is form 8606.

https://www.irs.gov/pub/irs-pdf/f8606.pdf

https://www.irs.gov/uac/About-Form-8606

It sounds like you might already have a traditional IRA that would make it tough to do a Roth conversion?

[disneysteve]

Yes, but you have to track the value of the non-deductible portion of the traditional IRA. Can be done, just a bit of a PITA.

Actually, that wouldn't be a problem for me. I already have a non-deductible traditional IRA from years ago. I no longer contribute to it but it would be very easy to start adding to it again. Everything in that account was non-deductible so if new money was as well, the record keeping wouldn't be an issue.

[MonkeyMama]

I'd just wait until the year is over and see what you can do. Is the simplest way to handle it. (& is precisely why you have until April 15th to decide).

The more you put into any work 401k or retirement option the lower your AGI will be. So that is something else to keep in mind.

I know you have a tax accountant. I highly recommend talking to them versus advice off the internet.

[Like2Plan]

I know you have a tax accountant. I highly recommend talking to them versus advice off the internet.

Of course, that is the best answer. Probably sooner than later. ( I think Disneysteve mentioned in another thread that he has already started funding his Roth for 2016. )

[disneysteve]

I know you have a tax accountant. I highly recommend talking to them versus advice off the internet.

Definitely. I just try not to bug him until after April 15 for questions that don't apply to the prior year's taxes. I save those up for after tax season is over.

[Singuy]

Definitely. I just try not to bug him until after April 15 for questions that don't apply to the prior year's taxes. I save those up for after tax season is over.

Steve, just pointing out that if your new job has their own 401k contribution, your traditional IRA contribution can no longer counted as a deductible off your taxes.

[disneysteve]

Steve, just pointing out that if your new job has their own 401k contribution, your traditional IRA contribution can no longer counted as a deductible off your taxes.

True. We can't make deductible contributions anyway due to our income so they would be non-deductible contributions.