Roth IRA Income Limit Question

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Topic Author
topaz318
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Joined: Wed Nov 14, 2018 1:52 pm

Roth IRA Income Limit Question

Post by topaz318 » Thu Aug 08, 2019 4:34 pm

Hello,

I believe the Roth IRA income limit for Married, filing jointly is $193,000–$203,000 for 2019.

I have a base pay component and a variable pay component as follows -

Base Pay - 165,000
Variable Pay - 41,200

Given the above, can I invest in a ROTH IRA directly or do I need to go the backdoor ROTH route?

Thank you!

sarabayo
Posts: 322
Joined: Fri Jun 29, 2018 6:59 pm

Re: Roth IRA Income Limit Question

Post by sarabayo » Thu Aug 08, 2019 4:39 pm

Income is income, whether it's base or variable. When you say "variable" I guess you mean that it's in stock grants or something, whose value might change by the time they are actually realized as income. Then I guess the valuation you give of 41,200 is its current value. At its current value, your income for the year will be $206,200 which is above the phaseout.

But in any case, if you're at all uncertain about whether you'll be hitting Roth IRA income limits, just do the backdoor. Anyone can do the backdoor and there's no downside to doing it over the normal contribution.

Also,
sarabayo wrote:
Fri Jul 19, 2019 5:27 pm
FYI, it is called a Roth IRA, not a "ROTH". First, there are other Roth accounts besides IRAs (such as Roth 401(k)s, Roth TSP, etc.). Second, "Roth" is not an acronym for anything. Roth IRAs are named after Sen. William Roth (R-DE) who pushed for them in the Taxpayer Relief Act of 1997.

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inittowinit
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Re: Roth IRA Income Limit Question

Post by inittowinit » Thu Aug 08, 2019 4:42 pm

Here is a link with an easy way to determine whether you're eligible to contribute: https://www.rothira.com/roth-ira-rules

If you are over the limit you may still be able to make a "backdoor" Roth IRA contribution: https://www.investopedia.com/terms/b/ba ... th-ira.asp

At a high level though, if you are unsure whether your income will be above the phaseout, you can simply wait until after the year ends, then decide how much to contribute once you know your MAGI. This is possible because you have until your 2020 tax filing deadline (4/15 for most) to make 2019 IRA contributions (Roth included). The first 3.5 months of the year are effectively a "grace period" for making IRA contributions for the prior year.

Topic Author
topaz318
Posts: 20
Joined: Wed Nov 14, 2018 1:52 pm

Re: Roth IRA Income Limit Question

Post by topaz318 » Thu Aug 08, 2019 5:30 pm

sarabayo wrote:
Thu Aug 08, 2019 4:39 pm
Income is income, whether it's base or variable. When you say "variable" I guess you mean that it's in stock grants or something, whose value might change by the time they are actually realized as income. Then I guess the valuation you give of 41,200 is its current value. At its current value, your income for the year will be $206,200 which is above the phaseout.

But in any case, if you're at all uncertain about whether you'll be hitting Roth IRA income limits, just do the backdoor. Anyone can do the backdoor and there's no downside to doing it over the normal contribution.

Also,
sarabayo wrote:
Fri Jul 19, 2019 5:27 pm
FYI, it is called a Roth IRA, not a "ROTH". First, there are other Roth accounts besides IRAs (such as Roth 401(k)s, Roth TSP, etc.). Second, "Roth" is not an acronym for anything. Roth IRAs are named after Sen. William Roth (R-DE) who pushed for them in the Taxpayer Relief Act of 1997.
Thank you! What I meant by variable pay is bonus, commission, etc.

deltaneutral83
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Re: Roth IRA Income Limit Question

Post by deltaneutral83 » Fri Aug 09, 2019 8:21 am

topaz318 wrote:
Thu Aug 08, 2019 4:34 pm

Given the above, can I invest in a ROTH IRA directly or do I need to go the backdoor ROTH route?
You will want to include things deducted by your employer like 401k, health care premiums, HSA, etc. etc which all lower your AGI. Might be a good idea to wait until Jan 1 to make 2019 contributions so you know for sure. Or you can just set up a backdoor and not worry about it.

CnC
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Re: Roth IRA Income Limit Question

Post by CnC » Fri Aug 09, 2019 11:03 am

Base Pay - 165,000
Variable Pay - 41,200
Total pay 206,200

401k contributions 19,000

Ago 187,200 puts you safely under the cut off.

TropikThunder
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Joined: Sun Apr 03, 2016 5:41 pm

Re: Roth IRA Income Limit Question

Post by TropikThunder » Fri Aug 09, 2019 11:11 am

CnC wrote:
Fri Aug 09, 2019 11:03 am
Base Pay - 165,000
Variable Pay - 41,200
Total pay 206,200

401k contributions 19,000

Ago 187,200 puts you safely under the cut off.
+1. The income limits are not gross wages.

sarabayo
Posts: 322
Joined: Fri Jun 29, 2018 6:59 pm

Re: Roth IRA Income Limit Question

Post by sarabayo » Fri Aug 09, 2019 2:00 pm

TropikThunder wrote:
Fri Aug 09, 2019 11:11 am
CnC wrote:
Fri Aug 09, 2019 11:03 am
Base Pay - 165,000
Variable Pay - 41,200
Total pay 206,200

401k contributions 19,000

Ago 187,200 puts you safely under the cut off.
+1. The income limits are not gross wages.
OP didn't say they're contributing 19k to a 401(k), or that they even have a 401(k). But it's true that if they do have one and are contributing to it, that lowers their AGI.

I'd still recommend just doing the backdoor and not worrying about it.

danaht
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Re: Roth IRA Income Limit Question

Post by danaht » Fri Aug 09, 2019 2:23 pm

sarabayo wrote:
Thu Aug 08, 2019 4:39 pm
... Anyone can do the backdoor and there's no downside to doing it over the normal contribution. ...
Just be careful. Although anyone can do this - this may result in taxable income if you already have a traditional IRA. If you do already have a IRA with before tax dollars - then your tax free back door Roth really just becomes a normal taxable Roth conversion.

deltaneutral83
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Re: Roth IRA Income Limit Question

Post by deltaneutral83 » Fri Aug 09, 2019 2:29 pm

danaht wrote:
Fri Aug 09, 2019 2:23 pm
sarabayo wrote:
Thu Aug 08, 2019 4:39 pm
... Anyone can do the backdoor and there's no downside to doing it over the normal contribution. ...
Just be careful. Although anyone can do this - this may result in taxable income if you already have a traditional IRA. If you do already have a IRA with before tax dollars - then your tax free back door Roth really just becomes a normal taxable Roth conversion.
Can you not just put it in the tIRA to begin with and then convert whatever portion of the overall tIRA you want to Roth in December or whatever?

sarabayo
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Joined: Fri Jun 29, 2018 6:59 pm

Re: Roth IRA Income Limit Question

Post by sarabayo » Fri Aug 09, 2019 3:04 pm

deltaneutral83 wrote:
Fri Aug 09, 2019 2:29 pm
danaht wrote:
Fri Aug 09, 2019 2:23 pm
sarabayo wrote:
Thu Aug 08, 2019 4:39 pm
... Anyone can do the backdoor and there's no downside to doing it over the normal contribution. ...
Just be careful. Although anyone can do this - this may result in taxable income if you already have a traditional IRA. If you do already have a IRA with before tax dollars - then your tax free back door Roth really just becomes a normal taxable Roth conversion.
Can you not just put it in the tIRA to begin with and then convert whatever portion of the overall tIRA you want to Roth in December or whatever?
No, danaht is correct -- you can't pick and choose what part of your IRA to convert (this is because of the "pro rata rule"). For example if you had $6000 in pre-tax money in your traditional IRA, and then you tried to do a backdoor Roth contribution of $6000 (that is, you contribute $6000 after tax to your traditional IRA and then convert $6000 from your traditional IRA into your Roth IRA), then of the $6000 you converted, half ($3000) would have to come from the pre-tax funds that already existed within the IRA. And so you'd have to pay taxes on that $3000 since it was pre-tax money.

Another way to think about it is that moneys in your IRA have a cost basis just like securities owned in a taxable account do. The pro rata rule basically says you're not allowed to separate it out into tax lots based on when you contributed it, and convert it according to a "spec ID -like" scheme. It's all one tax lot with one cost basis. In the example above, after making your $6000 contribution to the IRA, you won't have two separate lots, one of $6000 with a cost basis of $0 (the existing pre-tax money) and one of $6000 with a cost basis of $6000 (the after-tax contribution). You will have one lot, of $12000 with a cost basis of $6000.

Anyway, all of this is stuff is just part of the process of doing the backdoor Roth contribution. I agree with danaht that you should be careful to follow the procedure correctly. Please see the Bogleheads wiki page "Backdoor Roth" for more information, especially about how to avoid paying taxes during the conversion stage. In short, you either need to not have any pre-tax money in traditional IRAs, or you need to roll all such moneys into a 401(k). If you don't have a 401(k), you can still get a solo 401(k) if you're willing to start a small side business of some kind in order to earn some self-employment income.

mptfan
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Joined: Mon Mar 05, 2007 9:58 am

Re: Roth IRA Income Limit Question

Post by mptfan » Fri Aug 09, 2019 3:11 pm

topaz318 wrote:
Thu Aug 08, 2019 4:34 pm
I believe the Roth IRA income limit for Married, filing jointly is $193,000–$203,000 for 2019.
The limits are based on your "modified adjusted gross income" (MAGI) as defined by the IRS, not by your gross income.

deltaneutral83
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Re: Roth IRA Income Limit Question

Post by deltaneutral83 » Fri Aug 09, 2019 3:13 pm

sarabayo wrote:
Fri Aug 09, 2019 3:04 pm


No, danaht is correct -- you can't pick and choose what part of your IRA to convert (this is because of the "pro rata rule"). For example if you had $6000 in pre-tax money in your traditional IRA, and then you tried to do a backdoor Roth contribution of $6000 (that is, you contribute $6000 after tax to your traditional IRA and then convert $6000 from your traditional IRA into your Roth IRA), then of the $6000 you converted, half ($3000) would have to come from the pre-tax funds that already existed within the IRA. And so you'd have to pay taxes on that $3000 since it was pre-tax money.
What I am saying is to put the money into the tIRA to begin with (no after tax IRA involved) and then convert whatever amount inside the tIRA to Roth. The inconvenience of the backdoor option is lost, but ultimately, the desired result.

sarabayo
Posts: 322
Joined: Fri Jun 29, 2018 6:59 pm

Re: Roth IRA Income Limit Question

Post by sarabayo » Fri Aug 09, 2019 3:31 pm

deltaneutral83 wrote:
Fri Aug 09, 2019 3:13 pm
sarabayo wrote:
Fri Aug 09, 2019 3:04 pm


No, danaht is correct -- you can't pick and choose what part of your IRA to convert (this is because of the "pro rata rule"). For example if you had $6000 in pre-tax money in your traditional IRA, and then you tried to do a backdoor Roth contribution of $6000 (that is, you contribute $6000 after tax to your traditional IRA and then convert $6000 from your traditional IRA into your Roth IRA), then of the $6000 you converted, half ($3000) would have to come from the pre-tax funds that already existed within the IRA. And so you'd have to pay taxes on that $3000 since it was pre-tax money.
What I am saying is to put the money into the tIRA to begin with (no after tax IRA involved) and then convert whatever amount inside the tIRA to Roth. The inconvenience of the backdoor option is lost, but ultimately, the desired result.
Are we talking about a case where the tIRA already contains pre-tax money before you make the contribution? If so, then you will pay some taxes during the Roth conversion. I think it's hard to say that this is the same desired result as a backdoor Roth, which, if done properly, does not make you pay taxes in the year you do it.

cherijoh
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Location: Charlotte NC

Re: Roth IRA Income Limit Question

Post by cherijoh » Fri Aug 09, 2019 3:41 pm

sarabayo wrote:
Thu Aug 08, 2019 4:39 pm
Income is income, whether it's base or variable. When you say "variable" I guess you mean that it's in stock grants or something, whose value might change by the time they are actually realized as income. Then I guess the valuation you give of 41,200 is its current value. At its current value, your income for the year will be $206,200 which is above the phaseout.

But in any case, if you're at all uncertain about whether you'll be hitting Roth IRA income limits, just do the backdoor. Anyone can do the backdoor and there's no downside to doing it over the normal contribution.
I'm not sure I agree with that. If you have a balance in any form of traditional IRA (including SEP IRA) at the end of the year you will have to prorate the amount of the rollover that is not taxed. Therefore you would be paying taxes which would have been postponed if you had made a regular Roth contribution.

I would also say that the opportunity to mess up and subsequently receive a notice from the IRS is exponentially higher although - almost totally avoidable if people didn't get sloppy and actually took the time to read the instructions.

If I were in OP's situation I would simply postpone contributing to the Roth IRA until you ran your taxes early next year.

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