Wednesday, December 12, 2012

Do I earn too much to have a Roth IRA? Nope.

There is an income limitation for contributing "directly" to a Roth IRA ($173,000 Modified Adjusted Gross Income for 2012 for married couples filing jointly).  However, back in 2010, the income limitation for Roth "Conversions" expired, completely.  Thus, it is not possible to earn too much to have a Roth IRA.  If you exceed the income limitations for a direct contribution to a Roth IRA, one just needs to make a non-deductible contribution to a Traditional IRA then "convert" the Traditional IRA to a Roth IRA as soon as possible.

Annual contribution limits for IRAs and Roth IRAs are $5,000 per person in 2012 and $5,500 in 2013 unless you are over 50 in which case your annual limits are $6,000 and $6,500 for 2012 and 2013, respectively.  Thus, a husband and wife can EACH put $5,000 away this year for a total amount of $10,000, or $12,000 if they are both over 50.  I recommend everyone get money into a Roth IRA every year if at all possible since earnings grow tax free and withdrawals in retirement are also tax free.

I wrote the other day that most folks should NOT contribute to a Roth 401(k); this is especially true if you are not already maxing out your Roth IRA eligibility - whether directly or through the backdoor conversion method I described above.  It makes no sense to pay higher income taxes now just for the privilege of putting money into a Roth 401(k) if you are not maxing out your Roth IRA eligibility each year since that won't cost you a dime.  

If you are a high earner that was previously ineligible for a Roth IRA due to the income limitations, I highly recommend you take advantage of the backdoor method while you can.  The backdoor method only became possible with the expiration of the income limits on Roth IRA conversions in 2010.  I was surprised when Congress did not close this loophole before it happened in 2010.  Thus, it would not shock me if Congress closed this loophole sometime in the future.

Click here to see an article about common IRA mistakes.

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