Roth IRA question

[yayme1227]

I currently contribute to a Roth IRA and I know there is an income cap.
I still have a way to go to reach that but just asking for the future because I know we will probably exceed the limit in years to come.

My question is once our income is over the limit can my Roth just sit there until I retire as long as I do not make more contributions etc?

I just want to have this in the back of my mind in case I need to do something.

Fidelity Freedom Fund 2040 is the fund I use for my Roth IRA.

Thanks!

[noppenbd]

Yes, it can stay there. Just no contributions in any year that your MAGI exceeds the limit (currently 159K for MFJ).

EDIT: Sorry, contributions taper off above the limit.

[Spud]

I have a question related to this.

I am contributing $500/month to my Roth IRA.

I think we may be very close to the income cap this year. Of course, we probably won't know for sure until this time next year whether or not we are eligible for our Roth IRA. By that time, I will have already contributed the $5,000 maximum. What happens if I figure out that I am ineligible to contribute, and I've already done so?

[noppenbd]

Like I said, it is a gradual fadeout, not a cap. So it may be that you can only contribute 4500 if you are just over the number. You could hold off on the last 500-1000 until the end of 2008 when you can calculate your MAGI more exactly. I think it phases linearly over a $10K range, so if you are only over by $1000 on MAGI you would lose $500 in allowable contributions.

Also, check with your IRA provider whether you could recharacterize the Roth contributions to a traditional IRA. The deadline for doing this is usually April 15th of the following year, so you could wait until your taxes are done. But check first to make sure.

[Spud]

Also, check with your IRA provider whether you could recharacterize the Roth contributions to a traditional IRA. The deadline for doing this is usually April 15th of the following year, so you could wait until your taxes are done. But check first to make sure.

We found out today that we could only contribute $537 each into our Roths for 2007. I've already sent the check for the full $4k into each of our Roths. Dangit.

Aren't there income restrictions for Traditional IRAs as well? Or are they just considered not tax-deductible if your income is over the limit? I heard that in 2010 you can roll Traditional IRAs into Roth IRAs. Maybe this should be our plan of action?


yayme1227, I'm sorry to hijack your thread. I hope this info is of interest to you too.

[noppenbd]

I am not a tax attorney or CPA, but from my understanding: Yes there are income restrictions for traditional IRAs (sort of). If you exceed a certain MAGI, you can still contribute to the trad IRA, but the contribution will be "nondeductible". Then in 2010 you should be able to convert the "nondeductible traditional IRA" to a Roth IRA. Since you never received a deduction for the contributions to this IRA you shouldn't owe any tax on the conversion (not sure about the earnings though).

EDIT: Take care with this procedure if you already have a traditional IRA funded with deductible contributions. For tax purposes, even if the trad IRAs are at separate institutions, they are treated as one IRA. So when you try to convert just the nondeductible IRA, the IRS will consider the nondeductible funds on a pro-rated basis.

For example, if you have $3000 in nondeductible contributions to a traditional IRA and $17000 in another traditional IRA. If you want to convert the $3000, the nontaxable amount will be (3000/20000) x 3000 = $450, so the taxable amount is $3000-450= $2550.

[jIM_Ohio]

We found out today that we could only contribute $537 each into our Roths for 2007. I've already sent the check for the full $4k into each of our Roths. Dangit.

Aren't there income restrictions for Traditional IRAs as well? Or are they just considered not tax-deductible if your income is over the limit? I heard that in 2010 you can roll Traditional IRAs into Roth IRAs. Maybe this should be our plan of action?


yayme1227, I'm sorry to hijack your thread. I hope this info is of interest to you too.

You need to file a form with the IRS to recharactorize the Roth deposit to a traditional IRA deposit. Then you need to file a similar form with Roth custodian. I did this with turbo tax in 2007 and it was painless. Sent one form with my e-file and then sent another to T Rowe Price from their web site.