Wednesday, September 1, 2010

Income Too High For Roth IRA Contribution?

While there are no income limits for making an IRA contribution, there are income limits for making a Roth IRA contribution. For 2010 the limits are as follows (the limits are indexed for inflation each year):

Married, filing jointly $167,000 - $177,000
Married, filing separately $0 - $10,000
Single $56,000 - $66,000

If your income is above those limits, you cannot make a Roth IRA contribution.

BUT, you can still make an IRA contribution and then do a Roth conversion. There is no waiting period from the time you make an IRA contribution until the time you do the Roth conversion. So you can use this two step process to get funds into a Roth IRA each year.

The pro-rata rule will apply. If you have pre- and after-tax funds in any IRA you own, you must use the pro-rata rule for calculating how much of the converted amount will be subject to income tax.

You must report after-tax IRA contributions on Form 8606 for the year of the contribution. You also must subsequently file that form in any year you take a distribution from any IRA.

So, if you really want to make a Roth contribution, don’t let those pesky income limits stop you.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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