roth conversion
A. I thought that funding a roth ira with a married couple filing jointly is okay up to AGI of $150,000. This way they can both fund a roth for $6000 for 2008. am i right?
b. if i am right, why is a roth conversion only at $1ook for joint filing?
Thanks,
Doug
Permalink Submitted by Alan Spross on Wed, 2008-12-24 05:12
It’s actually modified AGI, which may add to a different amount that Form 1040 AGI. (See Pub 590, p 60).
For 2008 the limits for joint filers is:
Below 159,000 full contribution
159,000 -169,000 partial contribution
Over 169,000 no contribution
This applies separately to both spouses.
These limits get an inflation increase every year, but the conversion income limit is 100,000 and has not changed since the Roth was introduced in 1998. Moreover, the conversion limit is the same for singles and joint filers, whereas for regular contributions the income limits differ between singles and joint filers.
As to why – I guess you would have to ask Rep Bill Roth who designed the legislation………but he’s dead. 🙂
Permalink Submitted by [email protected] on Wed, 2008-12-24 17:08
Thank you for the clarification.
I had a client who converted $4000 into a roth last year in 2007, when her joint income was around 140k.
Should we take it out immediately?
Doug
Permalink Submitted by Alan Spross on Wed, 2008-12-24 17:39
Yes, before year end if possible.
It is too late to recharacterize a 2007 conversion, therefore it must be withdrawn as a regular distribution. The IRA custodian does not need to be told the reason for the withdrawal, just ask for a $4,000 distribution. No earnings calculation applies in this case.
Client will owe 6% excise tax for 2007 on Form 5329 ($240), but if the withdrawal is done before year end, there will be no excise tax for 2008. Form 8606 will be used to report the distribution on 2008 return. There should be no tax on the distribution. And another 5329 for 2008 will show that the excess contribution from 2007 has been corrected.
The IRS may bill interest on the $240 since it was due for 2007.
Permalink Submitted by [email protected] on Mon, 2008-12-29 18:56
Alan,
What would you do if his roth account is under $4000? He originally funded his roth with $3,000 in 2005 and then did the $4000 conversion in 2007. He is an aggressive investor and now his account is approx. $3500.
What do we do?
Doug
Permalink Submitted by Alan Spross on Tue, 2008-12-30 01:25
Assuming this is his only Roth IRA, he must close the account. There will be no tax on the distribution, only the 6% excise tax due for 2007 on the excess contribution of 4,000.
The distribution is reported on Forms 8606 and 5329.
Permalink Submitted by [email protected] on Tue, 2008-12-30 17:58
Thank you very much & have a wonderful New Year