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In most cases, you are absolutely correct. For the 2010 Roth IRA Conversion event, the IRS is making a special exception. The taxable gain is not all due in 2010 (actually payable by April 15th in 2011). The IRS will allow you to spread the tax over a two year period; 50% in 2011 and 50% in 2012.
That way the tax bill does not hit you all at once. Hope that helps!
This statement is not 100% correct. If you exceed the income limits you may still contribute to an IRA. The difference is that your contributions will be after tax contributions. However, you may want to make this contribution anyway because even if you are ineligible for a Roth IRA now (due to income limitations), that restriction disappears in 2010. Thus, if you have a conventional IRA now (even if funded with taxed contributions), you can convert that to a Roth IRA in 2010, making all of your withdrawals non-taxable. That is what I am doing.
Contributing to a Roth IRA is more subject to your AGI (Adjusted Gross Income). That will determine whether your eligible to contribute to a Roth. If you exceed the income threshold, you may want to consider contributing to a nondeductible IRA for 2008 and 2009 and then converting them both in 2010.
I'm about to set up our automatic contributions for the year so thanks for your help.
Heidi
You are allowed to take advantage of the catch up in the calendar year that you turn the age of 50. So yes, go ahead and adjust for the $6000 contribution for the year.
You are almost correct. The catch up contribution will increase by $500 but that does not begin until 2010.
Are you filing as an individual or joint? That will make a difference. I have the formula for you to calculate based on what filing status you fall under. http://www.goodfinancialcents.com/2009-roth-ira... (Flexo, I apologize if this against your comment policy)
Do I still qualify to invest the full $5000 ROTH IRA amount if:
1. laid off, with annual income under $15,000
2. retired (over 65) with no income
1. No maximum % of income, but you can only contribute to what you make. For example, if your income for the year is $4000, you can only contribute $4000.
2. I just kind of answered #2 above. You can only contribute to an IRA (Roth or Traditional) if you have earned income.
None of my business, but not sure if 1. your laid off or 2. retired with no income, if investing in a Roth IRA makes sense?
1. Does that count as capital loss deduction if I transfer the excess contribution to a taxable account?
2. Since the current value of my investment is less than the amount originally invested, do I have to liquidate my prior year contributions to bring it up to the original $5000 or do I just need to transfer the current value of the original investment?
1. The only way to generate a capital loss in your Roth IRA is to liquidate all your Roth IRA holdings, not just the 2008 contribution. If that is your only one, then you may be entitled to take the loss. Based on your second question, it looks as though you will not be entitled to the loss.
2. The investment/brokerage firm should be able to figure out what is the current value of the $5000 2008 contribution. The current depreciated value is all you have to take out. For example, if what you invested in is only worth $3000 today, $3000 is all you have to take out.
@ Jerald
You have to convert in the "calendar" year not the tax year, so you missed the boat for 2008.
Yes, same rule applies.
If I act before April 15th, can I pay the $8000 back, which would result in a net 2008 contribution of $5000?
Or since the withdrawal took place in 2009, does that effect my 2009 contribution limit? Can I then contribute $13000 in 2009, which results in a net 2009 contribution of $5000?
Or am I not allowed to pay back withdrawals? Then, I would be considered maxed out in 2008 and the most I could contribute in 2009 is $5000.
I'm in a unique positon and can't sem to find any answers. Please advise. Thanks
That is a very unique situation. When you take a distribution from an IRA, you have what's called the 60 day "borrow rule" http://www.goodfinancialcents.com/borrowing-aga.... Keep in mind that's 60 days from when you took the distribution. If you are looking to replenish the funds you withdrew, I suggest you deposit them immediately. That means that your 2008 contribution would be satisfied, but you would then need to deposit another $5k for your 2009 contribution.
Hope that helps!
You are correct on the ability to contribute to both a Roth and traditional so as long as you don't exceed the $5k limit (for under the age of 50). Unfortunately, the nondeductible IRA goes towards this as well. So, no, you won't be able to do what you hoped. I like the way you think though!
this is a weird situation that I've not seen addressed elsewhere. I contributed the fully-allowable $5K to my ROTH IRA in 2008. Then, to make a long story short, my husband was bought out of his job in late 2008 - which resulted in an unexpected flurry of stock options exercised, retention bonuses earned, etc. This windfall caused his annual earnings to exceed that of the ROTH contribution threshhold.
We realize that basically the $5k contributed to my ROTH is considered to be an excess contribution - and that there will be an income tax penalty on that money. Our thoughts were to take the $5K that was contributed in 2008 out of the ROTH and then open up a Traditional IRA. Is that allowable??? I'm having difficulty finding any information about doing this - everything I'm finding seems to be about converting Traditional funds to ROTH!
Thanks!
Jeff can fill you in with the details in case I've left anything out.
I have taken an 80% loss on my total ROTH this past year. Here is my question. If I close out my ROTH to take the tax loss can I then add an additional $5000 to a new ROTH account for 2008 tax year or can I add the $5000 to a traditional IRA instead for year 2008 if my agi makes it possible or will I instead have to allocate it to 2009 tax year. Second question, am I able to take the loss on my 2008 taxes since it is after December 31 or does the IRA use the April 15 date of the next year as a closing date for these purposes and I will have to wait till next tax year to file this loss?
Thanks
@ Patick. Same as Archer's Situation. Once you made a contribution to the IRA, that's your contribution for the year. The IRS will have a record of the contribution so you would not be able to cash out and recontribute. To take a loss you would have had to cash out in the calendar year, not the tax year. You are still able to do a recharacterization, keeping in mind that it will only be for the current value.
The only way you would be able to take a loss would be to completely cash out your total IRA balances which wouldn't make sense if you plan on contributing for 2009.
My situation is similar to Patrick's with a twist. If I have a Roth 401(k) and a Roth IRA, do I need to cash both out in order to take a tax loss or can I just cash out the Roth IRA? Obviouly, I'd rather not do this at all but other circustances may require me to do this for 2009.
Thanks!
@ ed DaMan Provided you don't exceed the income phaseout limits (phaseout begins at $166,000), you could then make a Roth contribution on each other's behalf. The would have to be separate, because they are Roth "Individual" Retirement Accounts. But as long as you have income that exceeds 10k, you are allowed to open an IRA for your nonworking spouse.
Assume same circumstances and not exceeding the income phaseout limits, EXCEPT the wife is self-employed making about $10,000 for the year and puts the maximum that she can into an Individual 401(k).
My understanding is that she can still contribute up to the maximum annual limit to her Roth IRA without regard to her 401(k). The total of all contributions to Roth IRAs and individual 401(k) is less than the earned income of the couple.
Do you also see it that way?
If I think I interpret your question correctly, your wife is self-employed and contributes her entire income into an individual 401k (I interpret that as a solo-401k), so in effect she reports no income. As long as your income doesn't exceed the phaseout limits then she'll be able to have a Roth based on your income.
Another way of answering your last question is that the most an individual can invest into all retirement plans (without advanced planning) is $49,000. That's Roth IRA, SEP IRA's, Solo- 401k's, etc. I think I answered your question, if not give me another shot.
Does a $12,000 earned income minimum, if both are over age 50, come into play since we are both over 60??
Our MAGI for year 2008 is less than $149,000.
thank you so much for the info - I appreciate it!
Thank you
Thanks.
What should I do....
1. Withdraw $5000 from my and $5000 from my Wife's account. Do I need to sell the securities.
2. Withdraw $4292 from each account as my wife made $708. Do I need to sell the securities.
3. Can I leave the securities there and pay the penalty 6% and consider the excess as non-deductible
contribution
Are there other options.........Thanks a lot
I am Yanet and I am 19 years old. I do not understand about the Roth Ira's system, Can you explain me it please. Also, can you help me with the formulas to do it. thanks
However, in 2010, the income limits on Roth IRA conversions disappear.
So next year, you can convert this year’s Traditional IRA to Roth IRA and realize the benefits of a Roth. However, please note that if you’ve made past tax deductible contributions to a Traditional IRA, those contributions will have a taxable impact on your conversion even if they aren’t a part of the conversion you undertake…
Why?
Since the IRS views your IRA as a single IRA (even though it may be spread across multiple separate financial accounts), it treats the contributions on a partial conversion as a percentage of the whole. So if 50% of your contributions were tax deductible and the rest weren’t, your conversion will be taxed accordingly, even if the converted funds were non-tax deductible themselves.
1. Is it okay that I leave the funds in the Roth IRA now that I make more than 120k?
2. Can/should I convert any of my traditional IRA funds to Roth IRA? Does the income limitation apply to conversions as well?
3. Is it okay for me to contribute to a 401k Roth IRA? What is the limit - if any? Is there really a difference on income limits on Roth IRA vs. 401k Roth IRA?
Thanks!
1. Yes. It’s okay to leave the funds you’ve already contributed to your Roth in your Roth IRA even though you now earn more than the Roth IRA income limits allow. The income limits are for making NEW contributions. So you can leave your Roth IRA funds alone to grow tax free forever!
2. The question of whether or not you should convert your Traditional IRA to a Roth is more of a personal question. Consult a tax advisor to find out what the advantages and disadvantages are for your particular situation. As for income limits, in 2010, all income limits for making a Roth IRA conversion disappear. So that should NOT be a problem.
3. There is no income limit for making contributions to a Roth 401k. Your contribution is treated under the same rules as a regular 401k contribution except that its made with after-tax funds (it’s not tax deductible). And, of course, your withdrawals in retirement are tax free.
Here’s what the IRS website states in regard to the Roth 401k:
“Do the same income restrictions that apply to Roth IRAs apply to designated Roth contributions?
No, there are no limits on an employee’s income in determining if he or she can make designated Roth contributions. Of course, the employee has to have salary from which to make any 401(k) or 403(b) deferrals.”
I hope this information helps.
make a contribution to my ROTH IRA for 2009 ? Do I have to convert the whole amount or a little at a time ? Is there a time limit on converting from standard IRA to ROTH IRA ? thank you
If you convert in 2009, yes you will be subject to the same tax rate as your earned income for the year.
If your earned income does not exceed the Roth IRA phaseout limits, you can still contribute to a Roth IRA. The conversion will have no affect.
You can convert as little or as much as you want. There is no rule on this or any time limit.
I have some more information on the Roth IRA conversion here:
http://www.goodfinancialcents.com/2010-roth-ira... and http://www.goodfinancialcents.com/roth-ira-conv...
The whole process can be tricky. Make sure you have a tax professional helping you every step of the way ;-)
Bob Howard
Thanks,
Marcus
Thanks,
SL
Thanks!
Instead of attempting to explain, check out a post I did that walks you through the conversion process: http://www.goodfinancialcents.com/2010-traditio...
Let me know if you have any other questions.