Roth IRA income limit

[happygirl]

Due to unusual circumstances, my husband and I will make over 160k this year. From what I'm reading, we are not eligible to invest in a Roth IRA. My husband said he thinks they average your income over a 3 year period, but I don't think that's correct.

I read something that makes it sound like there is a new rule as of 2010 in which you can essentially deposit money into a traditional IRA, then roll it over into a Roth IRA so it would have the same effect, but I'm not sure that's accurate. I'm such a newbie at all this investment stuff.

If we aren't eligible to invest in a Roth, what would be our next best choice for retirement savings (beyond 401k through work).

Thanks once again for your help!

[creditcardfree]

Great question. I checked the irs website and it looks that if your adjusted gross income is under $166,000 as a married couple for 2009 you can contribute the full amount. If your income is between $166,000 and but under $176,000 you contribute a some money to a roth. You could, however, contribute the remainder to a traditional ira.

If your AGI, is above $176,000 you are not eligible for a Roth IRA in 2009.

There is a new rule for 2010 regarding Roths. I'm sure someone else can explain that or look around on the irs website.

[disneysteve]

creditcardfree is correct, and I want to stress that the contribution limit is based on modified adjusted gross income (MAGI), not actual gross, so it is after you deduct a bunch of stuff which means you might still come in ok.

As for the 2010 thing, in 2010, they will suspend the income limit on converting a traditional IRA to a Roth. Currently, you can't convert if your MAGI is over 100K.

[happygirl]

So we could put money into a traditional IRA this year, regardless of income, put in more money early 2010 (maybe January), then convert all of it over to a Roth soon after (maybe February)?

Are the contribution limits on a traditional IRA?

[disneysteve]

So we could put money into a traditional IRA this year, regardless of income, put in more money early 2010 (maybe January), then convert all of it over to a Roth soon after (maybe February)?

Are the contribution limits on a traditional IRA?

Yes, you could fund a traditional for 2009 and 2010 and then convert later in 2010, at least as I understand the rules.

Contribution limits on a traditional IRA are the same as for a Roth, currently $5,000/year if you're under 50, $6,000 if you are 50 or older.

Keep in mind that when you convert a traditional to a Roth, you do need to pay the taxes on that money if you deducted your contribution (which wouldn't apply to you because your income is over the deductible limit) and tax on the earnings the account has gotten.

[LivingAlmostLarge]

Is it worth converting to a Roth IRA? If you don't qualify it might not be worth it if your income is so high already.

[creditcardfree]

Contributions limits on a traditional IRA are also $5000 for 2009.

In 2010, the limits for both roth and traditional will be $5000 plus inflation.

These limits per individual. Of course, for anyone else reading this you and or your spouse must also have earned income equal to the amount that you contribute to an IRA.

[MonkeyMama]

I would wait until you file your taxes to determine what IRA you are eligible (you have until April 15th of the following year to fund an IRA - precisely for this reason).

I would also vote for the 2010 ROTH conversion. There are income limits on Traditional IRAs for them to be currently tax deductible. There are no income limits on non-deductible contributions.

If your income is high, of course you want to take advantage of a ROTH (no reason to increase your taxable income with taxable investments).

[happygirl]

Our typical income is closer to 100-120k. We expect to make a higher income only for another year or two.

I'm not so worried about the contribution limits CCF, my question was more about the income limits, but I appreciate any and all input.

It sounds like we can put 5k each into a traditional IRA this year (before April 15), another 5k each next year, then convert the total over into a Roth for the long term. I guess that's my plan for now unless anyone has a better one?

Thanks again!

[disneysteve]

If you do transfer from a traditional to a Roth IRA - this is a taxable event so that you know and also still subject to the income limitations. Most people consider making that move when they are retired and their income is less.

That's true, EXCEPT in 2010. That year, there will be no income limit on conversions.