Roth contribution
If someone contributes to a roth and is not eligible to do so because they make more than $160k AGI, what are their options? What are the penalties?
If someone contributes to a roth and is not eligible to do so because they make more than $160k AGI, what are their options? What are the penalties?
Permalink Submitted by Alan Spross on Sat, 2007-12-29 06:08
Actually, the top of the phaseout range for 2007 is 166,000 for joint filers. For the amount of the excess, there are 3 choices:
1) Withdraw the excess and allocated earnings no later than the extended due date. The earnings are taxable and subject to penalty.
2) Recharacterize the excess to a TIRA contribution. Although that contribution is not likely deductible, Form 8606 can be filed to report the non deductible contribution. The contribution and the earnings are transferred to a TIRA account.
3) If the earnings on the excess are large, ie 40% plus, you can leave the excess in the account beyond the extended due date, and pay a 6% excise tax for 2007. If you then withdraw the contribution amount without earnings prior to 12/31/08, the earnings stay in the Roth. When the earnings are in that 30% plus area, this may make sense. If you actually qualify for a 2008 Roth contribution, that excess can be applied to 2008 and need not be withdrawn.
What is best for you depends on individual circumstances, but for most people, solution #1 would be best.
Permalink Submitted by Raymond Gonzales on Fri, 2008-01-04 05:36
I am married and filed married filing jointly I also have 4 children that I claim. I made 110,000 last year, but was told I made to much to open a Roth IRA. I contribute 15% to a company 401K and get 6% match of 50% up to the 6%. I was told that I would be better off contributing the 6% and put the rest into a Roth IRA. I also have some money in a 401k from 10 years ago. It is $14000. If I can open a Roth IRA would I be able to roll this money into a Roth IRA?
thanks Raymond
Permalink Submitted by Alan Spross on Fri, 2008-01-04 19:56
You cannot convert to a Roth IRA if your modified adjusted gross income is over 100,000. Therefore, unless you expect that figure to drop in 2008, you cannot roll the 401k into a TIRA and then convert, nor can you do a direct transfer from the 401k to a Roth IRA if your former employer offers this option, which is newly available this year. The income limit stays at 100,000 until 2010, when it permanently disappears.
Therefore, in order to contribute to a Roth IRA, you will need to make regular contributions instead of conversion contributions. Whoever gave you the income limit for regular contributions was incorrect, or perhaps they thought you were single. For married joint filers, the modified AGI to make regular contributions begins to phase out at 156,000 for 2007 and 159,000 for 2008. Therefore, you ARE eligible to make Roth contributions since your income is well below those limits unless there is other income that you left out such as investment income.
It is correct that you should definitely contribute to the 401k enough to take advantage of the full company match. Whether you should make a Roth IRA contribution or just contribute more to the 401k depends on several circumstances, but the Roth is a good idea unless you expect your tax rate in retirement to be lower than what it is now. Since it is difficult to predict your retirement tax rate, it is a good idea to have at least some retirement assets in a Roth account.