Income Limit on Roth IRA Contribution

[iat24]

Hi everyone,

I am starting a new job soon and have a question regarding the income limits when contributing to a Roth IRA. My salary will have a high variable component, so I won’t know until the end of the year what my MAGI for 2013 ends up being. If I would like to max out my Roth IRA (as opposed to splitting between Traditional and Roth), how can I do this if I would like to dollar cost average into a Roth IRA during 2013? Do I need to wait until early 2014 once I know my MAGI and only then be able to determine whether and, if so how much, I can contribute to my Roth?

Thank you for any input you might have!
Ilan

[Bob's not my name]

First make sure you're maxing your 401k plan, since this reduces your MAGI by $17,500. Also read about the back door Roth on the wiki.

[livesoft]

I'd wait until next year to contribute if you are at all in doubt. The DCA route is not something I would do in this situation.

[stilts1007]

My wife and I are close to the limit or at least the phase-out period too (depending on a couple random tax things we are still waiting on) and my tax guy basically said just to wait until everything is figured because it is way easier to but it in later than to put it in earlier and have to try to take it out. If you have maxed out 401(k) and still want to DCA during the year, I guess taxable may be the way to go, then put in a lump sum at the start of the following year after W-2s and everything come back.

[iat24]

Thank you to each of you for the response. All help answer my question. I will max out my 401(k), wait until after year-end before contributing to my Roth, and not DCA during the year.

[Bacchus01]

Just do a back door and forget about MAGI.

[JW Nearly Retired]

Thank you to each of you for the response. All help answer my question. I will max out my 401(k), wait until after year-end before contributing to my Roth, and not DCA during the year.

That's best. DCA is a waste of time anyway, especially on such small investments.
JW

[iat24]

Thanks all. With respect to a backdoor Roth, I have read some people say to wait a certain period before converting from a traditional to a Roth. I assume the longer one waits, the higher the chance of paying more tax upon conversion. Is there a minimum number of days to wait before making the conversion?

[SSSS]

Thanks all. With respect to a backdoor Roth, I have read some people say to wait a certain period before converting from a traditional to a Roth. I assume the longer one waits, the higher the chance of paying more tax upon conversion. Is there a minimum number of days to wait before making the conversion?

There is no minimum amount of time to wait & no real reason to wait. Also, it's best to use a money market fund in the traditional IRA to avoid fluctuation. In practical terms, they money will be there for at least one day, and it's annoying to have to keep track of tiny +/- $10 market fluctuations. I had a $11 single-day loss in 2011 & it's still a factor in the tax return I'm preparing now.

[Karamatsu]

There's really no problem in this situation. Lots of people don't know if they'll be over (or under) the limit until the end of the year. You can make the full contribution to the Roth now, and if it, at the end of the year, you're over the limit, you can reverse the contribution without penalty as long as you withdraw (a) the amount of the contribution and (b) any earnings attributed to that contribution before the tax filing deadline for the year in question (so if the contribution is for 2013 the deadline for penalty-free withdrawal is normally April 15, 2014). Usually all this involves is filling out a form and sending it to the custodian. They compute the earnings attributable and all you do is tell them where to transfer the money. But of course you should check with your IRA custodian to see what their procedure is.

See IRS Publication 590 pp. 65-66 for the official explanation.

[iat24]

That is very helpful. Thank you for the info.