Roth Income Limit

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wabbajack
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Roth Income Limit

Post by wabbajack » Thu Sep 20, 2018 9:15 am

I found out recently that there is an income limit for contributing to Roth IRAs. While this shouldn't be an issue this year, it may be in the future that my income runs up against these limits. I've added a quote for the pertinent rule in 2018 that applies to me:
If you file as single, head of household or married filing separately (if you did not live with your spouse at any time during the year) your MAGI must be less than $120,000 to contribute up to the limit.

If your MAGI falls between $120,000 and $135,000 you cannot contribute the full amount. Your contribution is reduced. Use the IRS worksheet to calculate your new reduced Roth IRA contribution limit.

If your MAGI is $135,000 or more you cannot contribute to a Roth IRA.
Let's say I make $100k in salary, and my bonus can be anywhere from $10k to 30k, and I don't have a good idea of what it is until end of year. What should I do with regards to Roth contributions? Should I wait until I get my W2 before tax time, and then make a lump sum contribution (max: $5.5k) before the tax deadline?

What happens if I make contributions to the Roth IRA, and then I find out later that my contribution is reduced? (This has not happened - just planning ahead) What's your strategy for contributing to Roth?

fabdog
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Re: Roth Income Limit

Post by fabdog » Thu Sep 20, 2018 9:20 am

Most folks in this situation, and also those who know their income will be too high, use the "backdoor" approach, where you make a non deductible Traditional IRA contribution, and then convert that to a Roth. The conversion is not taxable, except for any gains that may have accrued while the money was in the TIRA.

For example, you contribute $5500 to a TIRA, and then when you convert to a ROTH it's grown to $5505. Only the $5 is taxable

This assumes you don't have any other IRa balances (from previous deductible IRA contributions or 401K rollovers) which then make it more costly, as you have to pro rate the amount of your deductible and non deductible contributions

There is no income limit to perform the traditional to Roth IRA conversion

Mike

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luminous
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Re: Roth Income Limit

Post by luminous » Thu Sep 20, 2018 9:22 am

I am in this situation. I’m close enough to the limit that I did a Backdoor Roth rather than a direct Roth contribution. That way no matter how my income for the rest of the year turns out I will not have broken any rules.
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2022.

GAAP
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Re: Roth Income Limit

Post by GAAP » Thu Sep 20, 2018 9:29 am

Make a prior-year contribution after you've calculated your taxes.

https://www.irs.gov/retirement-plans/tr ... -roth-iras
What is the deadline to make contributions? Your tax return filing deadline (not including extensions). For example, you can make 2017 IRA contributions until April 17, 2018.

JW-Retired
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Re: Roth Income Limit

Post by JW-Retired » Thu Sep 20, 2018 9:47 am

wabbajack wrote:
Thu Sep 20, 2018 9:15 am
What happens if I make contributions to the Roth IRA, and then I find out later that my contribution is reduced?
This happens all the time and it can be undone if you fix it before your taxes are filed. Google "what happens if you contribute to a roth ira but made too much money",............ or anything remotely like that.

Then read up on "Backdoor Roth" in our Wiki. Assuming you don't already have money in a tIRA, Rollover IRA, SEP or Simple IRA, and you are willing to file one more yearly tax form (IRS 8606), you can get around the Roth contribution limit very easily.
JW
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Darth Xanadu
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Re: Roth Income Limit

Post by Darth Xanadu » Thu Sep 20, 2018 9:51 am

GAAP wrote:
Thu Sep 20, 2018 9:29 am
Make a prior-year contribution after you've calculated your taxes.

https://www.irs.gov/retirement-plans/tr ... -roth-iras
What is the deadline to make contributions? Your tax return filing deadline (not including extensions). For example, you can make 2017 IRA contributions until April 17, 2018.
This is a valid approach, but do keep in mind that if you go this route, and end up having to take the back-door option, then you have to report the contribution on your 2018 tax return but the conversion on your 2019 tax return. Not a big deal, but sometimes folks can get tripped up by the reporting. For this reason, I (now) always do the backdoor and conversion in the calendar year for the year of contribution.
"A courageous teacher, failure is."

FiveSixAce
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Re: Roth Income Limit

Post by FiveSixAce » Thu Sep 20, 2018 9:56 am

luminous wrote:
Thu Sep 20, 2018 9:22 am
I am in this situation. I’m close enough to the limit that I did a Backdoor Roth rather than a direct Roth contribution. That way no matter how my income for the rest of the year turns out I will not have broken any rules.
May be off topic, but I had a straightforward question about the mechanics of performing a back-door contribution.

Lets say I currently have a Roth IRA at Fidelity with several years of regular Roth contributions and an account value of $20,000.

If in 2019 I determine my income exceeds the Roth contribution limit, is it as easy as opening a traditional IRA account at Fidelity, contributing $5,500, and rolling the balance (before investing) over to my existing Roth IRA at Fidelity. If it is this easy, can I leave the Traditional IRA open and empty to do this year after year? Thanks for any insight!

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Darth Xanadu
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Re: Roth Income Limit

Post by Darth Xanadu » Thu Sep 20, 2018 11:08 am

FiveSixAce wrote:
Thu Sep 20, 2018 9:56 am
luminous wrote:
Thu Sep 20, 2018 9:22 am
I am in this situation. I’m close enough to the limit that I did a Backdoor Roth rather than a direct Roth contribution. That way no matter how my income for the rest of the year turns out I will not have broken any rules.
May be off topic, but I had a straightforward question about the mechanics of performing a back-door contribution.

Lets say I currently have a Roth IRA at Fidelity with several years of regular Roth contributions and an account value of $20,000.

If in 2019 I determine my income exceeds the Roth contribution limit, is it as easy as opening a traditional IRA account at Fidelity, contributing $5,500, and rolling the balance (before investing) over to my existing Roth IRA at Fidelity. If it is this easy, can I leave the Traditional IRA open and empty to do this year after year? Thanks for any insight!
Yes, it's that easy. Precisely what I do. Note you may have a few pennies that post to your traditional IRA account after your conversion. I just roll these into Roth as well.
"A courageous teacher, failure is."

FiveSixAce
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Re: Roth Income Limit

Post by FiveSixAce » Thu Sep 20, 2018 11:57 am

Darth Xanadu wrote:
Thu Sep 20, 2018 11:08 am
FiveSixAce wrote:
Thu Sep 20, 2018 9:56 am
luminous wrote:
Thu Sep 20, 2018 9:22 am
I am in this situation. I’m close enough to the limit that I did a Backdoor Roth rather than a direct Roth contribution. That way no matter how my income for the rest of the year turns out I will not have broken any rules.
May be off topic, but I had a straightforward question about the mechanics of performing a back-door contribution.

Lets say I currently have a Roth IRA at Fidelity with several years of regular Roth contributions and an account value of $20,000.

If in 2019 I determine my income exceeds the Roth contribution limit, is it as easy as opening a traditional IRA account at Fidelity, contributing $5,500, and rolling the balance (before investing) over to my existing Roth IRA at Fidelity. If it is this easy, can I leave the Traditional IRA open and empty to do this year after year? Thanks for any insight!
Yes, it's that easy. Precisely what I do. Note you may have a few pennies that post to your traditional IRA account after your conversion. I just roll these into Roth as well.
Great to know, thanks for the reply. Seems like this would be the thing to do if you want to contribute early in the year, and if your pay is like mine in the sense that you may not know where your total will end up at the end of the year. Thanks again.

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Earl Lemongrab
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Re: Roth Income Limit

Post by Earl Lemongrab » Thu Sep 20, 2018 1:49 pm

Do you have a 401(k) or similar plan? If so, traditional contributions reduce your MAGI and can help keep you out of phase-out.

trix4jit
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Re: Roth Income Limit

Post by trix4jit » Thu Jan 03, 2019 1:43 pm

Earl Lemongrab wrote:
Thu Sep 20, 2018 1:49 pm
Do you have a 401(k) or similar plan? If so, traditional contributions reduce your MAGI and can help keep you out of phase-out.
I've wondered about this, specifically the distinction between AGI and MAGI. I read https://www.irs.gov/publications/p590a# ... 1000230489 but am not sure whether or not I can deduct the $18,500 from my income in order to avoid the phase-out. Thoughts?

For example, the 2018 Roth limit starts at $120,000. If I fully max 401k at that sample income, would I be in the clear to max Roth?

The Wizard
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Re: Roth Income Limit

Post by The Wizard » Thu Jan 03, 2019 2:49 pm

trix4jit wrote:
Thu Jan 03, 2019 1:43 pm
Earl Lemongrab wrote:
Thu Sep 20, 2018 1:49 pm
Do you have a 401(k) or similar plan? If so, traditional contributions reduce your MAGI and can help keep you out of phase-out.
I've wondered about this, specifically the distinction between AGI and MAGI. I read https://www.irs.gov/publications/p590a# ... 1000230489 but am not sure whether or not I can deduct the $18,500 from my income in order to avoid the phase-out. Thoughts?

For example, the 2018 Roth limit starts at $120,000. If I fully max 401k at that sample income, would I be in the clear to max Roth?
A couple of points.
First, 401(k) contributions are typically done via a salary REDUCTION agreement, so that money never even appears as income.
Strictly speaking, if it was a Schedule A DEDUCTION, that would be after your AGI was computed and wouldn't lower it.

Secondly, if you're anywhere close to the start of the Roth phase-out zone, just do a backdoor Roth contribution and rest easy...
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Earl Lemongrab
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Re: Roth Income Limit

Post by Earl Lemongrab » Thu Jan 03, 2019 3:16 pm

trix4jit wrote:
Thu Jan 03, 2019 1:43 pm
I've wondered about this, specifically the distinction between AGI and MAGI. I read https://www.irs.gov/publications/p590a# ... 1000230489 but am not sure whether or not I can deduct the $18,500 from my income in order to avoid the phase-out. Thoughts?

For example, the 2018 Roth limit starts at $120,000. If I fully max 401k at that sample income, would I be in the clear to max Roth?
Yes. In fact, with a 401(k) you don't deduct anything. The income just never shows up on your W2 or Sched C.

trix4jit
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Re: Roth Income Limit

Post by trix4jit » Sat Nov 16, 2019 7:10 pm

Thanks! All set!
Earl Lemongrab wrote:
Thu Jan 03, 2019 3:16 pm
trix4jit wrote:
Thu Jan 03, 2019 1:43 pm
I've wondered about this, specifically the distinction between AGI and MAGI. I read https://www.irs.gov/publications/p590a# ... 1000230489 but am not sure whether or not I can deduct the $18,500 from my income in order to avoid the phase-out. Thoughts?

For example, the 2018 Roth limit starts at $120,000. If I fully max 401k at that sample income, would I be in the clear to max Roth?
Yes. In fact, with a 401(k) you don't deduct anything. The income just never shows up on your W2 or Sched C.

lakpr
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Re: Roth Income Limit

Post by lakpr » Sat Nov 16, 2019 8:46 pm

Any health insurance premiums deducted out of your paycheck, as well as HSA contributions, do not show up on W2 Box-1 either.

So if you are earning $100k, and you contribute $19k for 401k, $3500 for HSA, and another $2000 for health insurance premiums, even with a $30k bonus you are well clear of the $120k threshold for Roth phase out.

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