Income limits on IRA...I don't understand why!

[RyanD]

So, if my wife and I make under $177k a year we can contribute to an Roth IRA but if we make over that can can't contribute anything? How is that fair, why can't we have the same benefits as people that make less, what kind of retirement account are we supposed to have?

[kb1gra]

The kind that comes from being able to afford to put a pile of money in your own investments without needing the advantage of being tax free.

 

Basically, the point is, you make so much more money than you need that you don't get a tax benefit. Sucks to be rich, I guess. But since you'llbe much, MUCH more able to put away the truly necessary $500k+, and someone who makes $40k a year won't, why should you get a tax shelter?

 

The tax benefit to you on $5k a year if you make $177k is paltry anyway.

[cyglet]

So, if my wife and I make under $177k a year we can contribute to an Roth IRA but if we make over that can can't contribute anything? How is that fair, why can't we have the same benefits as people that make less, what kind of retirement account are we supposed to have?

 

Contact a financial advisor; there are tax sheltered accounts for that income level.

[Kevin20]

So, if my wife and I make under $177k a year we can contribute to an Roth IRA but if we make over that can can't contribute anything? How is that fair, why can't we have the same benefits as people that make less, what kind of retirement account are we supposed to have?

 

Contact a financial advisor; there are tax sheltered accounts for that income level.

 

 

To answer your complaint, the reason is simply politics. Any time you discuss any sort of tax break or tax reduction, including a tax break decades in the future, there are two problems:

 

- many politicians fear it will cause a shortfall in government tax revenue, hence bigger deficits, and

- those promoting the tax break will be criticized for giving a tax break to the rich.

 

(Note I am not being partisan here. It is a simple fact that the political body reacts as noted above; you can decide for yourself if those concerns are valid or not.)

 

Therefore, we end up with many compromises like income limits and exceptions, all of which make the tax code ever more complicated. So in other words, you are rich so you don't need any more special favors from your congressman (at least according to some people!)

 

There is actually not a lot a financial advisor can do for you in terms of special accounts or products (without getting into arcane potentially illegal tax evasion). It's not like there is some secret Roth IRA available only to rich people.

 

What they can do is review your whole picture to ensure you've got a good mix of tax treatment among 401ks, IRAs, and regular unqualified brokerage accounts, and see that in the long run you are taking advantage of lower-taxed dividend and long term capital gains income.

 

They might also suggest you put money into a variable universal life (VUL) policy, which is roughly like a life insurance policy with a Roth IRA tacked onto it. With that you can set yourself up for tax-free withdrawals in the future when you have accumulated a lot of money into it. However it is also costly as an investment product, so many people and financial advisors object to those.

Edited January 31, 2010 by Kevin20

[hegemony]

because married people are being punished. the roth IRA income cap for married is not DOUBLE that for singled.

it should be.

 

be careful with annuities. I have yet to find one that was worth for us. Fidelity has some lower cost ones, but even theirs has some difficult fine print.

[RyanD]

So, if this year I've already put the max $5k in but I'm over the limit what are my options? Do I just take it out and put it in a normal investment account? Does it makes sense to transfer it to a 401k or trad. ira since I've already paid taxes on it?

[hegemony]

So, if this year I've already put the max $5k in but I'm over the limit what are my options? Do I just take it out and put it in a normal investment account? Does it makes sense to transfer it to a 401k or trad. ira since I've already paid taxes on it?

 

you might want to talk to a tax professional. a traditional ira might be a good option only if you are maxing all pre-tax deferral retirement accounts.

 

I don't think you can because the roth money is "non qualified", but even if you can, do not transfer it to a 401k.

Edited January 31, 2010 by hegemony

[Kevin20]

So, if this year I've already put the max $5k in but I'm over the limit what are my options? Do I just take it out and put it in a normal investment account? Does it makes sense to transfer it to a 401k or trad. ira since I've already paid taxes on it?

 

 

At your level of income, if you have a 401k plan (or similar company plan available), you cannot make a deductible contribution to a traditional IRA -- for all the same reasons you can't do a Roth. To quote a website I googled:

 

In 2010, the adjusted gross income or AGI contribution limits for traditional IRAs were raised. If you are covered by retirement plan at work, then your tax-deductible contribution to a traditional IRA is phased-out if:

 

* Your filing status is married filing jointly and your AGI is more than $89,000 but less than $109,000.

 

(Note - you can still put up to $5000 into a traditional IRA, the contribution is just not deductible. Once in the account, gains are tax-deferred as usual. And when you pull money out in retirement, the original contributions are not taxed again; only the gains are taxed. That could be a good deal for you ... but there are probably better ways to invest, I think.)

 

You CAN put the max into a 401K pre-tax however, regardless of your income. That's a good idea to reduce your tax for the tax year in which you do that. For 2010 the IRS allows you to contribute up to $16,500 to a 401k (or $22,000 if you are 50 or older.) That gives a nice chunk of savings at your marginal tax rate. That's per person: your wife can also do the same if she's got a 401k.

 

If you have already contributed to a Roth but discover you are too high-income, there is a process for correcting that ... sorry don't know exactly what the paperwork drill is.

Edited January 31, 2010 by Kevin20

[athensgaguy]

This year you could put $5K in a traditional post tax then convert it to a Roth IRA.

[hegemony]

This year you could put $5K in a traditional post tax then convert it to a Roth IRA.

IIRC this rule is also true in 2011 and there is a tax penalty. if the traditional IRA money is non-deductible then there is not a lot of advantage of the roth.

[SpecialK22]

The advantage of the Roth is that both contributions and gains can be withdrawn free of income tax. With a non-deductible IRA, only the contributions but not gains can be withdrawn free of income tax. This is all assuming that these are qualified distributions.

 

For the OP, research contributing to a non-deductible IRA and converting to a Roth. This would allow you to backdoor your way into a Roth, particularly since there are currently no income restrictions for conversion. It has the potential to be a complex process as the rules for coversion are pro rata, so if you have a mix of deductible and non-deductible IRAs it is not as easy as just saying that you want to convert the non deductible portion but leave the deductible portion.

[athensgaguy]

This year you could put $5K in a traditional post tax then convert it to a Roth IRA.

IIRC this rule is also true in 2011 and there is a tax penalty. if the traditional IRA money is non-deductible then there is not a lot of advantage of the roth.

What?

 

If the money is non-deductible in a traditional you are still going to be taxed on the gains when you take it out and there will be required minimum distributions...

 

If you convert a non-deductible traditional to a Roth, you will pay taxes on any gains already made, but will maintain basis and won't have to pay taxes on further gains nor will there be RMDs (assuming no changes in the rules).

[smart1n]

This hit me by suprise last year (I file as head of household and did some serious OT at both of my jobs).

 

I had Fidelity convert the funds to a Non Deductible IRA.

 

I let the rollover nondeductible IRA funds money market account for the remaining of the 2009 year.

 

I converted the non-deductible IRA to a Roth last month.

 

By no means am I an expert at this.. just sharing my experience and making sure I am ok myself.

 

What you may want to look into is contributing after-tax dollars to your 401k (not to be confused with a Roth 401K) if your looking for more places to stash some cash and your plan allows it. I contribute 10 percent of my income from job 1 in after-tax dollars (job 2 does not offer this). This serves as a second tier emergency fund for me.. since only the after-tax earnings are a taxable event. The only thing I don't like is I have to take all after-tax contributions and earnings out in one lump sum.. but if I need this money I am probably in a bad situation anyway.

 

I agree with the others that a financial advisor may be the best route.

[smart1n]

Interesting..

 

Looks like there is a legal backdoor to Roth after all

 

http://online.wsj.com/article/SB1255735029...eTabs%3Darticle

[bullthistle]

H, the annuity that Fidelity has with The Principle paid 4.5% almost two years ago with a guaranteed of 3% and you can switch it back to your 401k if that's where it came from at 10% annually without penalty.