2012 Roth investment [Contribution limits]

[truthseeker]

Hello, have a question related to Roth investing.

I wanted to know if the limit given this year for "married filing jointly" as given below is based off 2012 income or 2011? This is what I found online. The reason I am asking is I am not able to get the 2012 estimate given all the income from various needs to be put together, which is generally the tax filing time in 2013. So I am wondering which year income I should be basing my contribution.

Also, I believe I may have over-contributed to my Roth given the limits below, so what's the best way to correct the situation without paying any penalty.

Thanks

"Married Filing Jointly: If you're married and filing a joint tax return, you can contribute a maximum of:

$6,000 if you're over 50 and your combined earned income is $173,000 or less
$5,000 if you're under 50 and your combined earned income is $173,000 or less
$0 regardless of age if your combined earned income is more than $183,000

If your earned income is somewhere between $173,001 and $183,000, your 2012 Roth IRA contribution limit phases out."

[baw703916]

Welcome to the board. You may find this page useful. It describes a work-around on the income limit issue.

http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Basically, what you need to do, if you are indeed over the limit, is to recharacterize your Roth contribution as a nondeductable regular IRA contribution, then convert to Roth (you will have to pay income taxes on any increase in value over the initial contribution, and the situation is much more complicated if you have any other non-Roth IRAs.

[livesoft]

Your 2012 Roth IRA contribution is based on your year 2012 income, so $173,000 is the maximum before you begin phasing out what you can contribute which is then completely phased out if your mAGI is $183,000 or higher.

The IRS tells you what to do if you have contributed too much in its Publication 590. It is relatively easy to fix this and there will be no penalty if you follow the IRS instructions. See, for example, http://www.irs.gov/publications/p590/ch ... 1000231024 where it states explicitly and clearly:

Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

I'd contact my Roth IRA custodian and say, "I've overcontributed for 2012, please help me withdraw the excess contributions and any earnings."

[Bob's not my name]

"Married Filing Jointly: If you're married and filing a joint tax return, you can contribute a maximum of:

$6,000 if you're over 50 and your combined earned income is $173,000 or less
$5,000 if you're under 50 and your combined earned income is $173,000 or less
$0 regardless of age if your combined earned income is more than $183,000

If your earned income is somewhere between $173,001 and $183,000, your 2012 Roth IRA contribution limit phases out."

Where did you get this quote? It is incorrect. Direct Roth contributions are limited by MAGI, not earned income. For example:

$214,000 gross earnings
+ $3,000 unearned (investment) income
- $34,000 401k contributions
- $4,000 pre-tax health, dental, and disability insurance premiums withheld from your pay
- $3,000 FSA contributions
- $3,000 harvested capital losses
----------------------------------
$173,000 MAGI --> fully eligible for two $5,000 2012 Roth IRA contributions

(I know where you got the quote. I Googled it. The problem with this internet thing is that you can always find cheesy for-profit websites with bogus information. The question is, why would you use such websites?)

[truthseeker]

Thanks.. this helps. I looked around, and this was one I pasted to confirm. You are right, it was not exactly right. Thanks for correcting the error, and providing an example too.

In this MAGI calculation, are 529 or eduction contributions deductible? Are there any other option to bring MAGI down from the one you listed in the reply?

Thanks again

[Bob's not my name]

529 contributions don't change your MAGI. I educe that you meant education and that you meant education deductions rather than contributions, but maybe I educe erroneously. Anyway, look at the first page of your 1040 to see the line items that affect AGI, and then read Pub 590 to see what modifications are necessary to yield MAGI for Roth purposes.

I must say I'm surprised by the question, since I inferred that you had close to $183,000 in "earned income" and therefore I concluded that you must easily be well under $173,000 MAGI. Put another way, you thought it was too close to call and then I gave you $40,000 of breathing room, and now you're still splitting hairs. It seems like you ought to be able to make a reasonably precise estimate of your 2012 income now.

[truthseeker]

I meant deduction for the amount I contributed towards education. I will take a look at the links you mentioned.

The reason I was splitting hair is because my 401k contribution did not add up to 34k as in your example. But as I know Personal contribution in a 401k can be maxed at 17.5k, so I am wondering how come you had 34k in there. Did you include your wife's too? My wife is not working. Could I have created an IRA in my wife's name even though she is not working, and take it as another deduction. Can I still do it for 2012, or it is late for 2012 now?

A happy and successful new year..

Thanks again

[Alan S.]

Yes, he was referring to 34 k 401k contribution for both spouses. That eliminates 17k for you. If your wife was not a retirement plan participant for the entire year, you can make a spousal contribution for her, however the MAGI deduction phaseout figure for her to deduct that contribution happens to be exactly the same as for a Roth contribution, ie 173-183 MAGI. If you find that your MAGI is less than 183k, you could both make a partial Roth contribution and if MAGI is under 173k, you both could make a full Roth contribution or she could make a deductible TIRA contribution and you could make a Roth contribution.

Any IRA contribution that you are allowed to make can be done as late as 4/15/2013 for 2012. An HSA contribution would also reduce your MAGI, as would a capital loss up to 3k if you happen to have net losses for 2012. If you have already over contributed, you can either recharacterize the Roth contribution as a non deductible TIRA contribution or remove it with allocated earnings. The earnings amount would be taxable and subject to 10% penalty.

[Bob's not my name]

And if your MAGI is too high for a spousal TIRA you won't be eligible for any education deduction.

[truthseeker]

How do you open a Spouse IRA? I have an employer 401k, don't qualify for traditional IRA, and Roth IRA looks like is phased out unless I find other ways to reduce my income. This spouse IRA may be an opportunity.

Where do you find the rules that say I can contribute to my wife's IRA (upto 17k) and take deduction when filing jointly? This link says a limit of 5000 when I search for it..

http://www.smartmoney.com/retirement/pl ... iras-7956/

No offense, but are you sure what you mentioned above is right? What I am missing?

[Alan S.]

Your spouse opens an IRA and contributes based on your taxable compensation. The max is the same for all IRA types, ie 5k for 2012, 5.5k for 2013 and 1k catchup for both years if the spouse has reached 50. The 17k limit does not apply to IRAs.

The deduction for this contribution if the spouse is not a retirement plan participant is the same as the Roth IRA MAGI phaseout. So if you in phaseout for a Roth contribution, that same phaseout % applies to your spouse being able to deduct the spousal contribution. However, if your spouse is covered by a retirement plan at any time in the year, the phaseout is much lower, the same as your phaseout range.

[sscritic]

Where do you find the rules that say I can contribute to my wife's IRA (upto 17k) and take deduction when filing jointly?

Technically, you can't. It's an Individual ra. It's not yours. You can't do anything to it, for it, or with it. Now you can give your wife some money so she can open her very own IRA. It's not even called a spousal IRA; it's just an IRA like any other IRA. It's the deduction part [correction: it's the contribution part] that comes from having a spouse with taxable compensation. That's you; you are the spouse that counts, but it's her IRA.

Read publication 590:

You can open and make contributions to a traditional IRA if:
• You (or, if you file a joint return, your spouse) received taxable compensation during the year, and
• You were not age 701/2 by the end of the year.

In this paragraph, you is your wife; your spouse is you. Or if you prefer, you are the spouse, your wife is the you.

And you are correct, it is not 17k. Did you read that in this thread? The only 17s I see in this thread are in reference to a 401(k) or are the first two digits of a number like $173,000.

[truthseeker]

So technically you are saying if you phase out for Roth, you phase out for Spouse IRA as well... ??

The 17k I got by dividing 34k by 2. The earlier gentleman had 34k as total 401k deduction..

Though taxes are not based on logic, why they allow total 34k 401k deduction when spouse is working, and not or limit it when she is not working... ?? I would think the need to save is more when you have low or no income..

[Jfet]

So technically you are saying if you phase out for Roth, you phase out for Spouse IRA as well... ??

The 17k I got by dividing 34k by 3. The earlier gentleman had 34k as total 401k deduction..

Though taxes are not based on logic, why they allow total 34k 401k deduction when spouse is working, and not or limit it when she is not working... ?? I would think the need to save is more when you have low or no income..

don't apply logic to the tax code. some people can contribute much more than 17k even unmarried to 4xx plans (read about 457 and 403b then throw remaining logic out the window)

[Alan S.]

There are no spousal contributions allowed except for IRA plans. The 34k assumed both spouses were not only working, but salary was high enough for each to defer 17k.

Here is a more user friendly chart covering some of these issues:

http://www.retirementdictionary.com/art ... imits-2013

[Bob's not my name]

The 17k I got by dividing 34k by 3.
Though taxes are not based on logic

So technically you are saying if you phase out for Roth, you phase out for Spouse IRA as well... ??

If your wife was not a retirement plan participant for the entire year, you can make a spousal contribution for her, however the MAGI deduction phaseout figure for her to deduct that contribution happens to be exactly the same as for a Roth contribution, ie 173-183 MAGI. If you find that your MAGI is less than 183k, you could both make a partial Roth contribution [or you could make a partial Roth contribution and she could make a partial spousal TIRA contribution] and if MAGI is under 173k, you both could make a full Roth contribution or she could make a deductible TIRA contribution and you could make a Roth contribution.

truthseeker, all the information you need is in this thread, but all the information we need to comment further is not. If you want a check on your numbers please provide them. Again, this is what a MAGI calculation would look like. Please substitute your real numbers (estimates are fine). Again, this is a simplification. Please also check the first page of your 2011 1040 and Pub 590 for other elements of MAGI that I don't list here. Note that what you enter on Line 7 is actually your earned income with 401k, insurance premiums, and FSA contributions already subtracted from it. Also note that if you are partially eligible for a spousal TIRA the spousal TIRA contribution does NOT reduce your MAGI for Roth eligibility purposes.

$200,000 gross earned income
+ $3,000 unearned income
- $17,000 your 401k contribution
- $3,000 FSA contribution
- $4,000 pre-tax health, dental, and disability insurance premiums withheld from your pay
- $3,000 harvested capital losses
---------------------------------------
$176,000 AGI