Roth Contributions - Income too high

[Hoosier]

Client has been making Roth IRA contributions throughout 2012. MFJ AGI levels will exceed $200,000. What are the ramifications of making these contributions when income is too high? What steps might be taken now to improve the situation?

[Lion]

Have client move them to a Traditional IRA with his broker. They will be nondeductible. Then he can convert to a Roth IRA following normal rules.

[DonPriebe]

Maybe

Have client move them to a Traditional IRA with his broker.

if he can. Maybe he is too old.

Then he can convert to a Roth IRA following normal rules.

And maybe paying taxes again if he already has an IRA with deductible contributions in it.

[taxxcpa]

Roth IRA

I had a client who made a contribution to a Roth IRA last year, assuming that her income was not too high, but she got a W-2 from her former employer for a large stock option amount which made her ineligible for a Roth contribution.

Her broker was able to remove the Roth IRA contribution and there were no tax problems. I filed it as if the Roth IRA contribution had never been attempted.

[Matt Sova]

High Income

I have clients that have no money in traditional IRA's and are over the income limit for Roth IRA's. In 2010 the income limit for rolling over Traditional's to Roth's was removed. They make their IRA contribution to a non-deductible Traditional IRA then convert 100% over to the Roth.

This will only work if they have no Traditional IRA money. If they had a traditional that has say 95,000 that is 100% tax deferred money, and they put in a 5,000 non deductible contribution they now have a traditional with 100,000 in it. If they then want to roll 5,000 to a Roth they cannot pick and choose the $5,000 non deductible contribution they just made. The rollover would be 5% non-deductible, non-taxable money and 95% or $4,750 of taxable.

[Roland Slugg]

This will only work if they have no Traditional IRA money.

... and if they're not too old, as DonPriebe correctly pointed out above. There is no cutoff age for contributions to a Roth IRA, whereas for a traditional IRA it is 70½.