Roth IRA

2010 Roth IRA Contribution Limits

January 6th, 2010  |  Published in Roth IRA  |  2 Comments

With a new year comes a new limit for contributions, however 2010 will have the same contribution limits as 2009.

For 2010, the contribution limit for Roth IRAs will be $5,000 for Age 49 and Below; $6,000 for Age 50 and Above (to reflect the “catch-up” amount).

If you are getting a jump on 2010 contributions, remember to mark your contributions as 2010 Roth IRA contributions or your brokerage may be confused. If you don’t write anything, your brokerage will likely mark the contributions for 2010 but it’s better to be safe than sorry.

Income Limits on Roth IRA Conversions Set to End

December 22nd, 2009  |  Published in IRA, Roth IRA  |  3 Comments

Currently if you earn over $100,000 you are not eligible to convert your Traditional IRA to a Roth IRA. The Tax Increase Prevention and Reconciliation Act of 2005 abolished the income limit and the change will take effect as of Jan. 1,2010. The government has also included a one-time option to spread your tax payment over two years. If you convert in 2010 you could pay 50% of the tax owed in 2011 and 50% in 2012. You will need to plan ahead to decide whether it is better for you to pay the total tax bill in one year or two.

Whether you should choose to convert or not is another question. This depends on whether you would come out ahead paying the taxes at the time of conversion or when you retire.

Also as noted in a previous 2010 Traditional IRA conversion post the removal of the income limits for conversion creates a loophole that effectively removes the income limits for contributing to a Roth IRA.

Transferring Roth IRA Accounts

January 19th, 2009  |  Published in Roth IRA  |  3 Comments

Thinking about transferring your Roth IRA from one brokerage to another? The easiest way to do this is to make a direct brokerage to brokerage transfer. If you simply withdraw your funds, you have the added burden of having to report the non-taxable distribution on your tax return and then show that you’ve contributed the funds back into a Roth IRA. The reason you will have to do this is because your first Roth IRA custodian didn’t know that you were just transferring the funds, they think you withdrew it. In the next few weeks (end of January), they’ll send you a 1099-R showing that you took a withdrawal when in fact you withdrew just to transfer the funds.

This is similar to the type of situation that happens when you roll over a 401(k) into an IRA. Be sure to do a trustee to trustee transfer so that you don’t run into this problem. If you have any questions, simply ask the brokerage firms on both sides how they handle this sort of thing and they will help you out.

Roth IRA: No Required Minimum Distribution

June 19th, 2008  |  Published in Roth IRA  |  Comments Off on Roth IRA: No Required Minimum Distribution

If you have a Traditional IRA or 401(k), you are required by tax rule to start taking required minimum distributions (most of the major brokerages have tools to help you manage this) by April 1st of the year after you turn 70 1/2. One of lesser known benefits of a Roth IRA is that there is so such similar requirement to take required minimum distributions. You are in total control when it comes to RMDs and Roth IRAs.

Granted, you can begin taking distributions at 59 1/2 on 401(k)s, so by the time you reach 70 1/2 you may need those distributions. However, it’s always nice to know that you can take out your funds on your terms, especially since the government won’t have let you touch it without penalty (outside some generally negative situations, first home excluded).

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My post on Naming Beneficiaries on Retirement Plans was selected as an Editor’s Choice at the Money Hacks Carnival #17 – Music of the ’80s hosted at Mrs. Nespy’s World. Thanks!

Tax Underpayment Penalty on Roth IRA Conversions

June 18th, 2008  |  Published in Roth IRA  |  1 Comment

If you’re considering converting your Traditional IRA to a Roth IRA, remember that you will need to pay taxes on the conversion amount and you may be subject to an underpayment penalty because of it (if you fail to file estimated tax payments).

The federal tax law regarding underpayment is straightforward. If you pay more taxes this year than you owed last year, you’re in the clear. If you don’t but are within 90% of your tax liability, you are also in the clear. State tax law will differ and you’ll have to check with your state (for example, Maryland’s law is that you have to pay more than 110% than last year or be within 90%).

So, if you make a conversion, be sure to begin paying estimated tax payments with a 1040ES so you aren’t subject to a penalty. As always, consult with a tax professional before you make any important decisions.

Warning About Snowflaking into Roth IRAs

June 6th, 2008  |  Published in Roth IRA  |  2 Comments

Snowflaking, or micropayments, is a clever idea but when it comes to paying off debt but when you are talking about contributing towards retirement, you have to keep several things in mind.

First, the rules of a Roth IRA, which will be easiest to snowflake into, state that you are only permitted to contribute earned income. If you don’t have a full time job and are relying on small irregular income such as filling out surveys or performing odd jobs, you won’t be able to contribute that to a Roth IRA unless you claim it as income. While you should always claim that as income, oftentimes people don’t and so you could find yourself in a quandary if you don’t claim it as income but still contribute into a Roth IRA.

If you have a full time job and the take home pay exceeds the $5,000 limit, you have nothing to worry. If you don’t declare that income, you have enough regular income to contribute so the snowflaking still works. If you don’t have W-2 or other earned income, you could run into problems.

Second, keep track of your contributions. If you are irregularly contributing to your Roth IRA, it may contribute too much in a year. If you do and have to make withdrawals, it can become a pain to roll back the contributions (you have to calculate how much of the annual appreciation is the result of your over-contribution and then pay taxes on it).

If you keep those two concerns in mind, everything should be dandy!

Snowflaking Your Way To Retirement

April 22nd, 2008  |  Published in Roth IRA  |  2 Comments

Snowflaking is a play on words off Dave Ramsey’s Snowball psychologically-driven debt busting technique and it refers to putting small amounts towards your debt, snowflakes, to help eradicate debt. One of the ideas of snowflaking is that you can find small alternative sources of income and then push it towards your debt but you could really put it towards anything. You’re snowflaking when you drop your loose change in the piggy bank, so why not apply this towards retirement?

Snowflaking won’t work for things like a 401(k) since it will be a payroll deduction, but you could use it to fund your IRA, Roth or Traditional. I recommend using the piggy bank approach, putting small amounts of money into your piggy bank and then making one deposit each month, hopefully in addition to your monthly Roth IRA contribution. If you’ve maxed out your retirement fund, that’s wonderful and you can skip this. If you don’t max out your contributions to your Roth IRA each year, consider using snowflaking to help get you even closer. Remember, the 2008 Roth IRA contribution limit is $5,000 if you’re under 50 and $6,000 if you’re over (it’s the catch-up provision).

Roth IRA Contributions from Social Security

April 4th, 2008  |  Published in Roth IRA  |  Comments Off on Roth IRA Contributions from Social Security

If you’re retired and drawing payments from Social Security, you may be wondering if you could use those payments as contributions to a Roth or Traditional IRA. Unfortunately, Social Security is not considered earned income so it’s not counted towards what you’re allowed to contribute towards an IRA. Earned income is anything that is reported on a W-2 or something you put on a Schedule C, if it’s business income, or Schedule F, if it’s farm income.

This rule also applies for income you may derive from a pension, interest, dividends, rental income, or capital gains. So, all that interest you got from the bank doesn’t count as dollars you can put towards an IRA.

How To Become A Millionaire: Retirement Is Key

February 13th, 2008  |  Published in 401K, Roth IRA  |  3 Comments

On my mainstream personal finance blog, Blueprint for Financial Prosperity, I penned an article today called How To Become A Millionaire (In 6 Easy Steps!) that begins with a two steps focused solely on retirement. For the retirement saving savvy out there, these two steps are obvious and a staple of retirement planning. Step 1 is to contribute to your company’s 401(k) plan and, hopefully, get yourself a nice employer match for your efforts. Step 2 involves contributing towards a Roth IRA so that you can diversify your tax profile, a little of tax-deferred to go with your tax-free retirement investments.

Becoming a millionaire isn’t difficult but it does require discipline. It’s extremely difficult to take some of your hard earned money and lock it up in a time capsule you won’t open for twenty, thirty, or forty years. It’s even harder if you have current financial demands such as children, bills, etc that are vying for your next dollar. If you have the discipline to do it, you should be handsomely rewarded with a more fulfilling retirement.