Roth IRA Phase-Out

[luke0513]

Hello all,

This is a good problem to have - My wife recently accepted a new job and we will be above the income phase out for our Roth IRA's next year. This is even assuming that I max my 401k (wife does not have 401k option), we will still be far above the limit in 2013.

Two questions:

1) Besides my 401k contributions, is there anything else I can do to reduce our AGI further?
2) I am considering re-directing the money that would have gone to the Roths to pay down the house quicker. Does it make more sense to open a taxable account given the mortgage interest deduction?

Thanks.

[dad2000]

Any answer we give you right now might be invalidated by Congress in the next few days or months.

I suspect that as legislation gets passed, many Bogleheads will start discussing new or adjusted tax-efficiency strategies.

[livesoft]

You can lose money in the stock market. Up to $3000 of your losses reduce your AGI.
You can have an HSA or FSA and/or large health insurance premiums deducted pre-tax. All these will reduce AGI.
You can quit work.
You can ask for a lower salary, but keep working. Most employers do not object to this at all.
You can arrange your investments so that you have no taxable income on Schedule B.

Paying the mortgage does not change AGI, but does reduce the amount of money you can invest at a higher rate.

[STC]

Backdoor

[NYBoglehead]

Backdoor Roth IRA is suggested. I am not a "fiscal cliff" expert but I do not think that this would be affected one way or another.

If you've got extra cash to spare I don't think paying down the mortgage faster is a bad idea. Many disagree, saying you could get a higher return elsewhere, but at the same time it is a guaranteed return (which the market is not) and once the mortgage is paid off that eliminates a huge monthly expense. They can't add payments on once the house is paid off. Depends on your interest rate of course, if you've got a rate that is below 4% it will be sub 3% in your tax bracket. May or may not make sense, but don't dismiss it as a possibility.

Also a possibility after the Backdoor Roth IRA is investing in munis.

[zzcooper123]

If your AGI goes to 92K, you can still contribute to a deductible IRA ($6000 each), correct? Even is both spouses contribute to 401k's.

[Alan S.]

If your AGI goes to 92K, you can still contribute to a deductible IRA ($6000 each), correct? Even is both spouses contribute to 401k's.

MODIFIED AGI, not AGI from your tax return. If joint MAGI does not exceed 92k both spouses can take a deduction of the full TIRA contribution. If you ended up in the MAGI phaseout range (92-112), you can deduct a portion and have the rest recharacterized as a Roth IRA contribution or have the rest returned to you as a partial corrective distribution with allocated earnings.

[zzcooper123]

Thank you, Alan S. I should have known that. Good idea about recharacterizing as Roth.

[retiredjg]

Rather than send the money to taxable, I'd use the backdoor contribution to Roth IRA unless there are some other IRAs in the way. I would not send the money to the mortgage if you are only saving in one 401k (total of $17,500). I think you need to save more for retirement than that.

But after putting the equivalent of 2 IRAs into either the back door or taxable, whatever is left over after that could go to the mortgage, in my opinion.

[Bob's not my name]

Your prior posts indicate no existing pre-tax TIRAs, so two back door Roth IRA contributions seem to be in order.

Remember that your MAGI for Roth eligibility purposes is your gross income minus not just your 401k contributions ($17,500 in 2013), but also pre-tax health, dental, and disability insurance premiums withheld from your pay, health and dependent care FSA contributions, HSA contributions, and up to $3,000 of capital losses. livesoft already pointed these out. I'm just reiterating to point out that your MAGI may already be lower than you think. Look at your W2 and the first page of your 1040.

Also remember that the MAGI phaseout in 2013 will be $178,000 - $188,000, so your gross income probably has to be over $210,000 for you to be completely ineligible for direct Roth contributions and restricted to the back door method. The phaseouts are stupid, of course, but congressmen don't like people who make more than congressmen.

[chipmonk]

This is a good problem to have - My wife recently accepted a new job and we will be above the income phase out for our Roth IRA's next year. This is even assuming that I max my 401k (wife does not have 401k option), we will still be far above the limit in 2013.

I am in a similar (lucky!) situation.

It looks like my Adjusted Gross Income for 2012 will be just slightly under the $110k limit for a Single-Filing taxpayer. And I expect that with a small raise, higher anticipated bonuses, and more dividend income in the coming year, I will be over the limit.

I am planning to do a Backdoor Roth to avoid the limit. Since I have no other IRAs besides my Roth IRA to worry about, it should be a relatively simple process to do this through Vanguard, as I understand it:

• Open a Vanguard deductible IRA account separate from my Roth IRA account.
• Fund the deductible IRA account with $5,500 (new 2013 limit) on January 2.
• Convert to a Roth IRA as soon as possible, perhaps the next day.
• Pay whatever (minute) amount of tax I owe on the gains prior to conversion in my 2013 tax return.

Any caveats with these steps?

[scubacat]

This is a good problem to have - My wife recently accepted a new job and we will be above the income phase out for our Roth IRA's next year. This is even assuming that I max my 401k (wife does not have 401k option), we will still be far above the limit in 2013.

I am in a similar (lucky!) situation.

It looks like my Adjusted Gross Income for 2012 will be just slightly under the $110k limit for a Single-Filing taxpayer. And I expect that with a small raise, higher anticipated bonuses, and more dividend income in the coming year, I will be over the limit.

I am planning to do a Backdoor Roth to avoid the limit. Since I have no other IRAs besides my Roth IRA to worry about, it should be a relatively simple process to do this through Vanguard, as I understand it:

• Open a Vanguard deductible IRA account separate from my Roth IRA account.
• Fund the deductible IRA account with $5,500 (new 2013 limit) on January 2.
• Convert to a Roth IRA as soon as possible, perhaps the next day.
• Pay whatever (minute) amount of tax I owe on the gains prior to conversion in my 2013 tax return.

Any caveats with these steps?

Some people have expressed concern that by converting a Roth within a short period could cause problems with the IRS. (If you do a search you will find a number of threads on this topic.) I was afraid that I was going to be over the limit for 2012, so I funded my nondeductible traditional IRA in August and plan to convert it to a Roth in early 2013.

[retiredjg]

I am planning to do a Backdoor Roth to avoid the limit. Since I have no other IRAs besides my Roth IRA to worry about, it should be a relatively simple process to do this through Vanguard, as I understand it:

• Open a Vanguard deductible IRA account separate from my Roth IRA account.
• Fund the deductible IRA account with $5,500 (new 2013 limit) on January 2.
• Convert to a Roth IRA as soon as possible, perhaps the next day.
• Pay whatever (minute) amount of tax I owe on the gains prior to conversion in my 2013 tax return.

Any caveats with these steps?

There is no such thing as a "deductible IRA". There is a traditional IRA and contributions to a traditional IRA can be deductible or non-deductible. In the case of using the back door, your contributions will be non-deductible. If they were deductible, you'd be paying tax on the entire conversion, not just the earnings.

So I think you have the procedure right, but the terminology wrong. It is an important concept though because you have to file this as two separate actions - a non-deductible contribution to tIRA followed by a conversion to Roth IRA. (This is not absolutely correct. Technically, you could make a deductible contribution and then convert it to Roth by paying taxes. But people using the back door generally make too much money to deduct their contributions to tIRA.)