Author Topic: Roth Income Limit  (Read 6767 times)

unitsinc

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Roth Income Limit
« on: January 18, 2013, 03:37:04 PM »
Hey guys,

Just got my W2 this year. I haven't had a chance to fully check everything out, but I made much more than I realized and I MAY be past the income limit for investing into my Roth.

Are there any loopholes around this?

I know it's based off of my AGI, which I haven't calculated yet, but it's gonna be really close.

James

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Re: Roth Income Limit
« Reply #1 on: January 18, 2013, 03:42:13 PM »
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

I don't use the option because I could use my 401k Roth option for any Roth needs.

forward

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Re: Roth Income Limit
« Reply #2 on: January 18, 2013, 04:15:03 PM »

Yes the backdoor Roth is an option.

To add to the question.  Is there a real advantage to doing the backdoor Roth.

I guess they are - it grows tax free and can be withdrawn tax free after 591/2.  From what I've read, if you expect to be in a lower tax bracket in retirement then the advantage may be less?

James

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Re: Roth Income Limit
« Reply #3 on: January 18, 2013, 04:52:26 PM »

Yes the backdoor Roth is an option.

To add to the question.  Is there a real advantage to doing the backdoor Roth.

I guess they are - it grows tax free and can be withdrawn tax free after 591/2.  From what I've read, if you expect to be in a lower tax bracket in retirement then the advantage may be less?


Exactly. I was very excited about the Backdoor Roth option, until I realized I would probably be in a lower bracket when I retire anyway.

matt_g

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Re: Roth Income Limit
« Reply #4 on: January 18, 2013, 06:18:35 PM »
Oh hell ya.  Open a Traditional IRA account, you can do this with vanguard over the phone.  Put in $5k (you won't get a deduction, but don't worry), then immediately roll that over into a roth.  POOF, you've maxed out your ira regardless of your income.

http://www.forbes.com/sites/ashleaebeling/2012/01/23/the-backdoor-roth-ira-advanced-version/

Undecided

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Re: Roth Income Limit
« Reply #5 on: January 18, 2013, 09:07:58 PM »

Yes the backdoor Roth is an option.

To add to the question.  Is there a real advantage to doing the backdoor Roth.

I guess they are - it grows tax free and can be withdrawn tax free after 591/2.  From what I've read, if you expect to be in a lower tax bracket in retirement then the advantage may be less?
,

Exactly. I was very excited about the Backdoor Roth option, until I realized I would probably be in a lower bracket when I retire anyway.


But if the back door Roth is relevant, then you're (presumably) paying the taxes on that $5,000 ($5,500 this year) income anyway, regardless of whether you route it to the Roth---once that's the case, isn't the advantage of the Roth always just about that retirement tax bracket anyway, regardless of whether that will be lower than, the same as or greater than your current rate?

DK

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Re: Roth Income Limit
« Reply #6 on: January 18, 2013, 09:08:34 PM »
Hey guys,

Just got my W2 this year. I haven't had a chance to fully check everything out, but I made much more than I realized and I MAY be past the income limit for investing into my Roth.

Are there any loopholes around this?

I know it's based off of my AGI, which I haven't calculated yet, but it's gonna be really close.

if you're going to be above or close to the income limits, i gotta believe you would be better off putting it in a traditional ira and getting the tax deduction now. i would be surprised (or very impressed) if you were going to be pulling in that much in retirement to make the numbers worthwhile to put it in a roth.

if you still want to put it in though, like others stated, use the "loophole" and pay the taxes now on it.

Undecided

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Re: Roth Income Limit
« Reply #7 on: January 18, 2013, 11:03:10 PM »
Quote from: DK link=topic=3388.msg50263#msg50263 dat.
[/quote

if you're going to be above or close to the income limits, i gotta believe you would be better off putting it in a traditional ira and getting the tax deduction now. i would be surprised (or very impressed) if you were going to be pulling in that much in retirement to make the numbers worthwhile to put it in a roth.

if you still want to put it in though, like others stated, use the "loophole" and pay the taxes now on it.

But in most cases (assuming the OP or spouse has a retirement plan at work), if the OP's above the limit to make a direct contribution to a Roth, doesn't he lose the ability to deduct a regular IRA (at the same income threshold)?

hoppy08520

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Re: Roth Income Limit
« Reply #8 on: January 19, 2013, 02:26:27 PM »
To add to the question.  Is there a real advantage to doing the backdoor Roth.

I guess they are - it grows tax free and can be withdrawn tax free after 591/2.  From what I've read, if you expect to be in a lower tax bracket in retirement then the advantage may be less?
There's a huge advantage of doing a backdoor Roth. Assuming you're over the income limits to doing a Roth, and you are investing $5,000.

Option A: invest $5,000 of post-tax money in a taxable account. Over the years, you'll pay taxes on the dividends and taxes on any capital gains.

Option B: invest $5,000 of post-tax money in a non-deductible IRA and then convert it to a Roth IRA. Over the years, you'll pay no taxes on the dividends and no taxes on capital gains.

I'll take Option B.

Also:
Quote
But in most cases (assuming the OP or spouse has a retirement plan at work), if the OP's above the limit to make a direct contribution to a Roth, doesn't he lose the ability to deduct a regular IRA (at the same income threshold)?
Yes. The income limits on a deductible traditional IRA are much lower than the income limits for a Roth IRA. This has the effect of making many higher-income individuals not eligible for a T-IRA, but eligible for a Roth. And if they've exceeded Roth eligibility, then they're in backdoor Roth IRA territory.

This page explains it pretty well. The numbers are for tax year 2012. The numbers have gone up for tax year 2013, but the general principles are the same:
http://iracontributionlimits2010.com/ira-contribution-cheat-sheet-2012/

http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

I don't use the option because I could use my 401k Roth option for any Roth needs.
Did you know you can contribute to a Roth 401(k) AND a Roth IRA? The contribution limits are independent of each other. If you're maxing your 401(k), and you have another $5,000 (or $5,500 for TY 2013) then you might as well put the additional $5,000 in an IRA (traditional deductible, Roth, or Roth via backdoor).

Steel_Rain

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Re: Roth Income Limit
« Reply #9 on: January 21, 2013, 12:56:56 PM »
Interestingly, Me and Mrs. Rain just did this.  We have maxed 401ks so the tax arbitrage arguement is sort of moot.  However, it has occured to me that having a nice pool of tax free income can help you manage your tax brackets when the time comes.  So many things are are also likely to be means tested and its likely that will be based on taxible income.  I think that having both is the right answer, lets you manage your taxes a lot better after retirement.  Just my 2 cents.


Steel
« Last Edit: January 21, 2013, 04:48:10 PM by Steel_Rain »

James

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Re: Roth Income Limit
« Reply #10 on: January 22, 2013, 07:02:01 PM »
Did you know you can contribute to a Roth 401(k) AND a Roth IRA? The contribution limits are independent of each other. If you're maxing your 401(k), and you have another $5,000 (or $5,500 for TY 2013) then you might as well put the additional $5,000 in an IRA (traditional deductible, Roth, or Roth via backdoor).


Good point, I should consider doing that.

DK

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Re: Roth Income Limit
« Reply #11 on: January 23, 2013, 12:34:49 PM »
Came across this today. Seems pertinent to the discussion.

http://money.cnn.com/2013/01/23/pf/expert/roth-ira.moneymag/index.html?iid=HP_LN

chucklesmcgee

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Re: Roth Income Limit
« Reply #12 on: January 23, 2013, 09:51:30 PM »
if you're going to be above or close to the income limits, i gotta believe you would be better off putting it in a traditional ira and getting the tax deduction now. i would be surprised (or very impressed) if you were going to be pulling in that much in retirement to make the numbers worthwhile to put it in a roth.

Depends what the tax rates are going to be.  In 1980, an inflation-adjusted $173,000 (Roth IRA income limit) would be taxed at 54%! I realize you may not draw $173,000 but the point is that you shouldn't assume you'll be in a lower bracket unless your retirement is imminent - you need to take into consideration the range of possible local,state and Federal taxes that you'll face in the future.