- Regardless of your modified adjusted gross income -- MAGI -- or filing status, you are eligible to contribute to a traditional IRA. If you're older than age 70 1/2, though, you'll have to consider a Roth. However, whether you are able to deduct your contributions is another story. MAGI limits vary based on filing status -- married taxpayers filing jointly have a higher limit. Whether your employer has a sponsored retirement plan affects the filing status as well. Quite simply, for 2011, the deductibility of your contributions begins to phase out at $90,000 for married taxpayers filing jointly. It's eliminated at $110,000. Limits for 2012 have not yet been identified.
- Roth IRAs, however, do have income limits. Like traditional IRAs, Roth limits vary upon filing status, with married filing jointly getting the biggest. Unlike traditional IRAs, anyone, regardless of age, may invest in a Roth IRA. The caveat: strict income limits. In 2011, if you and your spouse earn more than $169,000, the deduction will phase out. After $179,000, you will not be eligible to contribute to a Roth; you will only be able to contribute to a traditional IRA.
- Put a government loophole to work for you by beating the Roth IRA income limit. In January 2010, income limits on Roth IRA conversions were eliminated. This means that a taxpayer who would not be allowed to contribute to a Roth because he earns too much money will be able to open a traditional IRA and immediately convert it to a Roth account. Because the money he's contributing is after-tax, it's not taxed again upon the conversion from traditional to Roth.
- Keep in mind that Roth IRA income limits still apply to the converted account, however, meaning that you won't be able to fund the new Roth account after conversion if your income is too high. Also, note that the IRS will consider all of your IRA accounts as one account, so it's possible that only a percentage of your total assets will be considered. Because the rules regarding Roth conversions are so specific, it's best to consult a professional before proceeding. However, if you don't have a traditional IRA already, this can be a great way to fund a Roth.
previous post
next post