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.

Roth IRA & IRA Contribution Deadlines Approaching

March 5th, 2009  |  Published in Retirement  |  Comments Off on Roth IRA & IRA Contribution Deadlines Approaching

Just a helpful reminder to everyone thinking about a Roth IRA or a Traditional IRA, the deadline for your contribution is coming up. Not surprisingly, it’s April 15th. When you go to make your contribution, the maximum is $5,000 this year ($6,000 if you are 50+), be sure to mark down that you are making a 2008 contribution or the broker will automatically assume it’s for 2009.

Don’t forget to make your contributions!

2009 Roth IRA Contribution Limits

January 15th, 2009  |  Published in IRA  |  Comments Off on 2009 Roth IRA Contribution Limits

With a new year comes a new limit for contributions, however 2009 will have the same contribution limits as 2008. This will be the first year that contribution limits will be based on inflation but 2009 will have the same limits as 2008.

For 2009, 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).

Also, the phase-out ranges have been increased by $4,000 for Single filers and $7,000 for Married Filing Jointly. For single filers, ther ange is $105,000 to $120,000. For married filing jointly, the limit is $166,000 to $176,000. In 2010, the limit will be removed!

If you are getting a jump on 2009 contributions, remember to mark your contributions as 2009 Roth IRA contributions or your brokerage may be confused. If you don’t write anything, your brokerage will likely mark the contributions for 2009 but it’s better to be safe than sorry.

Roth IRA Conversion Could Trigger Tax Underpayment Penalty

August 27th, 2008  |  Published in Retirement  |  2 Comments

If you convert a Traditional IRA into a Roth IRA this year, remember that the balance you convert will be considered income and so you may be penalized for underpaying your taxes. There are several safe harbor conditions that would save you from the underpayment penalty (for example, if you did not owe taxes last year, then you would not be subject to the underpayment penalty this year) so check with a tax professional to ensure you are adequately paying your taxes to avoid this penalty.

There is no safe harbor simply because the underpayment was the result of a Roth IRA conversion so be sure to review it.

Unconvert A Roth IRA Conversion

August 18th, 2008  |  Published in Retirement  |  5 Comments

Here’s a gem of a recommendation from Kiplinger: If you converted a Traditional IRA to a Roth IRA this year and lost value on your investments, you can undo the conversion and then reconvert to save on taxes.

The process is called “recharacterization.” If you ask the IRA sponsor to recharacterize your conversion and put your money back into a traditional IRA, then you don’t need to report the original conversion to the IRS. Then you can convert the traditional IRA to a Roth later and pay taxes on the smaller balance.

The process is called recharacterization and you have to start it within six months after the due date of your return. So, if you convert it this year (2008), you have six months after April 15th, which is October 15th, to change your mind and undo it. Call up your brokerage and ask them how to recharacterize your Roth IRA back into a Traditional IRA.

Now, there are some gotchas:

  • You will still be subject to the $100,000 rule, which expires in 2010, on this new conversion.
  • You will not be able to convert it back to a Roth IRA immediately. You must wait until the year after the first conversion or 30 days after recharacterizing. So if you converted it last year (2007), you can’t convert until the calendar says 2009.

You can save yourself a lot of money if your investments lost value in the Roth after the conversion!

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).


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!

Early Withdrawal IRA Rules for Senior Citizens

June 6th, 2008  |  Published in Disbursements  |  Comments Off on Early Withdrawal IRA Rules for Senior Citizens

I had a reader Wallace send in this question:

What is the law regarding premature IRA CD withdrawals by senior citizens without penalty?

The law regarding premature IRA withdrawals depends on the type of IRA you have. If you have a Roth IRA, you can withdraw your principal without penalty as long as it’s been in the account for five years.

If it’s a Traditional IRA, you pay a 10% penalty in addition to your marginal tax rate if you are under the age of 59 1/2.

There are a few exceptions to the 10% early withdrawal penalty that may apply to your situation:

  • You are permanently or totally disabled,
  • You are unemployed and are paying for health insurance premiums,
  • You are paying for college expenses for yourself or a dependent,
  • You are paying for medical expenses exceeding 7.5% of your AGI,
  • Or the IRS has levied your retirement assets to pay off your tax debt.

If you fit any of those categories, you avoid the 10% penalty but you still have to pay your income tax on those funds.

Please consult with a tax professional before making any decisions, rules are constantly changing and this information may be out of date.