Roth IRA Limitations

[JohnH]

Couple is age 67 and both are receiving SocSec benefits. Wife receives pension benefits but does not work, so she has no W-2 earnings. Husband has w-2 earnings and he is covered by a pension plan at work. AGI is about $150K so they can't contribute to a traditional IRA. They are asking if they can each add $6,500 their Roth IRA's. Looks to me like they are both clear to do this. Is that correct?

[TXEA]

They may make Roth Contributions for 6,500 each as long as he makes at least 13,000.

[joanmcq]

Isn't the income limit for Roth contributions around 100k AGI? No time to look it up.

Oops, looked it up. My bad. My brain must be back in whatever year they started Roths, when the limit was $100K.

[FEDUKE404]

Roth IRA income limits

Yes, there most definitely are upper income limits for being allowed to put funds into a Roth IRA. (Your tax software should set off an alarm???) I have a couple of clients who "forget" that rule on a regular basis, and then create a real mess in order to resolve things.

(From IRS website for calendar year 2013)


Effects of filing status and MAGI :

married filing jointly or qualifying widow(er)
< $178,000 up to the limit


> $178,000 but < $188,000 a reduced amount


> $188,000 zero

****************


married filing separately and you lived with your spouse at any time during the year
< $10,000 a reduced amount


> $10,000 zero


***************


single, head of household, or married filing separately and you did not live with your spouse at any time during the year
< $112,000 up to the limit


> $112,000 but < $127,000 a reduced amount


> $127,000 zero



The MFS limit can be a REAL eye opener, especially for married clients who often tend to get "creative" with their tax returns. Previous posters have mentioned their considerable skills at creating many positive MFS scenarios, but this MAGI income consideration alone can be a deal breaker for making MFS > MFJ .

Aside from the upper income limitations, of course you first also have to meet the rules for being able to put any funds into a Roth IRA .

FE

[Burke]

And calculating MAGI for ROTH's is no picnic either. Most software doesn't do that.

[Gary2]

But they certainly can contribute to a traditional IRA, even if non-deductible, and then do a back-door Roth IRA conversion. This trick ends when they turn 70 1/2.

[JohnH]

Yes, I knew there were earnings limits and income requirements. That's why I mentioned the $150K of AGI. They can't do traditional IRA's, so the Roth is their only option. He has about $50K of W-2 earnings (included in the $150K) - she has no W-2 earnings.

[Gary2]

Yes, I knew there were earnings limits and income requirements. That's why I mentioned the $150K of AGI. They can't do traditional IRA's, so the Roth is their only option. He has about $50K of W-2 earnings (included in the $150K) - she has no W-2 earnings.

I'm not sure if I'm nitpicking a point that you understand but just stating in a confusing way, or if you're missing it.

There's no reason they can't do traditional IRAs. If they wanted to, they could make the contributions, file the 8606s to report the new basis, and choose not to bother with Roth's at all. It may not be their preferred option, but it's a legal option.

[JohnH]

Traditional IRA's are out, I believe. He is covered by a retirement plan at work.

[Gary2]

Traditional IRA's are out, I believe. He is covered by a retirement plan at work.

That just means he can't deduct the traditional IRA contributions. He's still allowed to make them.

[JohnH]

Oh, I missed your first point. He doesn't want to have basis in his deductible IRA's and then have to remember to calculate the taxable vs non-taxable part for the rest of his life when he begins withdrawing. It's cleaner & more efficient to just use Roth's for the non-deductible contributions. Plus, any earnings will be excluded from tax, and there won't be any RMD's when they reach 70-1/2.

Thanks to everyone for all the comments and questions. At this its of the year, some extra questioning helps keep the focus where it needs to be.