ROTH IRA Contribution - salary limit?

[maxim730]

Hi,

I read somewhere that if you earn more than ~$99,000 in a year (not sure of the exact number), you can't contribute to a Roth IRA account.

I opened a Roth IRA with Vanguard about 2 years ago (I'm 26 now). I currently earn more than $99,000

My question is - what happens to my current Roth IRA Account? Should I withdraw my contributions?

Is there any legal way around the salary limit? I rather contribute $4000 ROTH IRA yearly than be tempted to spend it elsewhere.

Thanks!!

[sweeps]

Excess Annual Contributions

Assuming you were eligible to fund your Roth 2 years ago, you're fine -- you do not have to withdraw. You just cannot continue contributing if you are over the limit. You'll have to look at other investment options.

[disneysteve]

The current income limits for contributing to a Roth are 99K if you are single and 156K if you are married filing jointly. That is for the full contribution. The amount you can contribute gradually decreases as income rises and phases out entirely at 114K single and 166K married.

Any contributions that were made while you were within the income limits can stay in the account. If you've overcontributed for 2007, you need to withdraw the excess. I'd recommend calling Vanguard and speaking to one of the retirement customer service people. They are excellent and can walk you through the process. Any forms you'll need will be downloadable from their site.

If you aren't eligible for a Roth, you may still be able to contribute to a traditional IRA but may not be able to deduct the contribution. Still beats spending the money.

[MonkeyMama]

Yes, you can contribute to a Traditional IRA, without a deduction, like Steve said.

In 2010 there is a tax loophole where you can convert this into a ROTH, regardless of income. IF I were you I would contribute the max to regular IRAs through 2010. In 2010 you can convert it all to a ROTH and combine it with your ROTH. It will grow tax free to retirement (or until tax law change anyway).

I'd go with that plan and then see what happens to the tax law under the next presidency. Lord knows, anything can happen.

Even without this loophole, you would still delay taxes on earnings until retirement. So a non-deductible IRA is a good bet if you don't qualify for anything else.

Your next best bet is to get married or find a job with a 401k. (e.g. if you are paid the same and put the max in your 401k it would lower your taxable income -and probably your taxes - enough to also allow you to contribute to a ROTH too. win-win).

http://finance.yahoo.com/expert/article/moneymatters/16201

[maxim730]

I do have a job and I contribute to its 401K. Marriage is my next step - the hardest part is finding the right woman who can manage finances properly :P

Thanks for your advice everyone.

[MonkeyMama]

I know, and I say that tongue in cheek. If you marry someone bad with money, probably not worth it. LOL. But if she didn't work, or make much, you could do the ROTH! (Until the next tax law change anyway...) Good Luck.

Also, just to point out I believe you contribution phases out between $99k & $114k (whatever the numbers are hits year). So when you do your taxes, the software will tell you how much you can contribute for 2007. You might be able to contribute some to a ROTH, between phase-outs and your 401k. If so, I would do what you can. The difference between the ROTH contribution and $4k can go to start a non-deductible IRA. You don't have to fund them until next April 15th. Just to clarify, if you did not know all these details. When you are on the verge, it is best to wait until you do your taxes before you fund your IRAs - see where you stand.

[jIM_Ohio]

note that Roth is based on AGI, not gross income.

Even if your Gross pay was 170k, if you could defer some of this (401k) and defer more (HSA) and defer more (dependant care account) and defer more (other salary deferrals) it's possible to get AGI well under 99k.

We gross close to max, but our AGI is nowhere near the max- thanks to close to 10k going to 401ks and other things taken out of checks.

[Knows Money]

Here's an idea. If you're over the limit on the Roth IRA, open a Money Market and "pretend" its another IRA account. Don't allow yourself to take the money out other than emergencies. This way, your first option is not to take money out of our Roth in case of emergencies and you can do all of the same things with your money market - trade securities and the like. Just a thought.

[banned]

I have a Roth IRA because I'm well under the maximum salary range. Does anyone know what the new contribution limits are in 2008? I think it is $5,000. I'm new here, so I apologize if this was already mentioned.

[disneysteve]

I have a Roth IRA because I'm well under the maximum salary range. Does anyone know what the new contribution limits are in 2008? I think it is $5,000.

That's correct. $5,000.

[lgslgs]

Yes, you can contribute to a Traditional IRA, without a deduction, like Steve said.

In 2010 there is a tax loophole where you can convert this into a ROTH, regardless of income. IF I were you I would contribute the max to regular IRAs through 2010. In 2010 you can convert it all to a ROTH and combine it with your ROTH. It will grow tax free to retirement (or until tax law change anyway).

And if you do that Roth conversion in 2010, after 5 years the conversion amount (not the gains on the conversion, though) can be withdrawn EXEMPT from the normal 10% penalty for withdrawal of retirement funds before age 59.5.

That can give you one more potential cash stream (along with taxable accounts and penalized early withdrawal + taxes from traditional IRA) if you retire early. Of course, pulling money out of tax protected accounts has it's drawbacks, but depending on your total income in may have a place as one tool in your overall "living off your nest egg" strategy.


Lynda

[rizzmo]

Maybe I'm missing something, are you saying that if you are married and make over 156k you can't contribute to a Roth IRA account? I have a 401k available, but was also going to start a Roth IRA for savings aside from that.

[jIM_Ohio]

The limit is AGI, not gross income. If you have deductions (mortgage interest, 401k) it's possible you could make 200k gross, but still qualify for the Roth IRA.