[Updated with latest Roth IRA limits] The latest income phase out ranges for the deductibility of Roth IRA contributions are shown in the table below. Contribution limits have marginally increased over the last few years while income threshold limits to get a contribution tax deduction have been adjusted in line with inflation.
You can only contribute to a Roth IRA for yourself and/or your spouse if you have earned income within or below the following thresholds.
|Roth IRA Contribution Limit
|Single Filer and HoH Income Phase Out Range
|Married, Joint Filer Income Phase Out Range
|Married, Filing Separate Income Phase Out Range
|$6,500 ($7,500 if 50 or older)
|$6,500 ($7,500 if 50 or older)
|$6,000 ($7,000 if 50 or older)
|$6,000 ($7,000 if 50 or older)
[Updated with 2015 Roth IRA limits and new IRS IRA roll-over rules] This IRS has published the 2015 Roth IRA contribution limits and deduction income thresholds. The contribution limit remained unchanged from 2014, but income levels rose in line with inflation. The IRS did however update the Roth IRA rollover rules which I discuss below as well.
The IRS has also clarified some rules on IRA rollovers which you need to be aware of. The clarification relates to the way the statutory one-per-year limit applies to rollovers between IRAs. Before 2015, the one-per-year limit applies only on an IRA-by-IRA basis (that is, only to rollovers involving the same IRAs).
Beginning in 2015, the limit will apply by aggregating all of an individual’s IRAs, effectively treating them as if they were one IRA for purposes of applying the limit. The IRS made clear that the new interpretation will apply beginning Jan. 1, 2015, and said that a distribution from an IRA received during 2014 and properly rolled over (normally within 60 days) to another IRA, will have no impact on any distributions and rollovers during 2015 involving any other IRAs owned by the same individual. This will give IRA owners a fresh start in 2015 when applying the one-per-year rollover limit to multiple IRAs.
Although an eligible IRA distribution received on or after Jan. 1, 2015 and properly rolled over to another IRA will still get tax-free treatment, subsequent distributions from any of the individual’s IRAs (including traditional and Roth IRAs) received within one year after that distribution will not get tax-free rollover treatment. A rollover between an individual’s Roth IRAs will preclude a separate tax-free rollover within the 1-year period between the individual’s traditional IRAs, and vice versa.
As before, Roth conversions (rollovers from traditional IRAs to Roth IRAs), rollovers between qualified plans and IRAs, and trustee-to-trustee transfers–direct transfers of assets from one IRA trustee to another–are not subject to the one-per-year limit and are disregarded in applying the limit to other rollovers.
[Updated with 2012 Roth IRA Limits] The IRS has released 2012 IRA information and there is no change to Roth IRA contribution limits over 2011 levels. Income ranges have increased slightly meaning more people are eligible to open a Roth IRA account in 2012. Updated details and a comparison to 2011 levels are shown in the table below.
2012 Roth IRA conversion from Traditional IRA: The rules for 2012 conversions are identical to the 2011 rules, meaning anyone can convert a 401k or a Traditional IRA to a Roth IRA regardless of income. However the ability to spread the tax burden of the taxes you must pay when converting to a Roth IRA, will no longer be available in 2012.
Remember, you can make contributions to your 2011 Roth IRA until April 17th of 2012, and to April 15th 2013 for your 2012 Roth IRA.
[2011 Roth IRA Limits] Following my updated article on new 401K and IRA limits, I thought I would look at some of the changes being made around traditional and Roth IRA’s in the year ahead, including contribution and recently introduced opportunities to convert between traditional and IRA accounts irrespective of income. Roth IRA’s generally differ from traditional IRA’s in that contributions are made after tax, but this is offset by having to pay no taxes when the funds are withdrawn at retirement.
Opening and contributing to a Roth IRA is currently restricted to those with an adjusted income limit (AGI) of $122,000 (individuals) and $179,000 (couples). The maximum annual contribution to Roth IRA’s is generally $5,000 for savers under the age of 50 and $6,000 for savers over 50. The table below provides a summary of Roth IRA contribution/AGI income limits from the IRS.
When Can You Make Contributions?
You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions). This means that most people can make contributions up to April 15. For example, you can start or make 2010 Roth IRA contributions until April 15th 2011.
Rules for Roth IRA Conversions
You can also convert from a traditional to Roth IRA, but the rules were quite restrictive. Only taxpayers with Modified Adjusted Gross Incomes (MAGI) of less than $100,000 in the year of conversion and not married filing separately may convert from a traditional IRA to a Roth IRA. However new tax laws in 2010 changed the conversion limit, meaning that people who have or are interested in investing for retirement via IRA’s need to look at which vehicle and contribution method (post or pre tax) is best for their situation.
From next year all taxpayers – even those making more than $100,000 a year in adjusted income – will be allowed to convert to Roth IRA accounts from Traditional IRAs. That means that more than 15 million Americans, can consider whether they want to make tax-deductible contributions if they have a traditional IRA or pay the taxes up front and have tax- free withdrawals during retirement with a Roth IRA. Which is better depends on future tax rates and how much the conversion will cost. It may not make sense to pay taxes today at a higher rate because many investors will be in a lower tax bracket during retirement, according to Tom Orecchio in a recent Bloomberg interview of various tax and financial planners, a fee- only adviser at Modera Wealth Management. “From a tax perspective, I think when people do the math, it’s not going to be as game changing as they expect it to be,” Orecchio said.
The Roth accounts, including those converted from traditional IRAs, must be held for five years and account holders must be at least 59 and a half before money can be withdrawn tax free. Savers who don’t follow the withdrawal rules or meet exemptions face a 10 percent penalty for distributions. Investors who decide to convert to Roth IRAs must declare the conversion amount on their tax forms. The tax owed depends on whether the assets being transferred are made up of pre or post-tax dollars. In 2010 only, converters will be able to pay the tax liability in 2011 and 2012.
There’s a fallback for investors who decide to convert and regret the decision. A Roth can be switched back to a traditional IRA account, or re characterized. Since investors who convert to a Roth IRA don’t have to pay taxes on the conversion until the following year, they have until April 2011, or October 2011, if they get an extension to file, to reverse the conversion, said Slott, the IRA consultant.
[2010 Update] Vanguard recently published some good factors to consider when considering converting an IRA to a Roth IRA. These include:
1. You have to pay taxes on the amount you convert. In return for the potential future tax breaks of a Roth, you have to pay income taxes when you convert. That means if you have money in a traditional IRA that you haven’t yet paid taxes on, you could have a substantial tax bill. Say you’re in the 28% tax bracket, you could owe $28,000 on a conversion of $100,000. Still, converting may benefit you in the long run if you expect you’ll be taxed at a higher rate when you retire. If you expect your rate will be lower, converting may not be beneficial. If, like most people, you’re not sure what your future tax rate may be, you could consider converting just part of your traditional IRA to a Roth. Doing so gives you “tax diversification” because you’ve got some money in a Roth and some still in a traditional IRA.
2. It’s a good idea to use money outside of your IRA to pay the conversion taxes. You can get the most benefit from switching to a Roth if you can pay the conversion taxes without using money from your IRA. If you convert and don’t pull money out of your IRA, you can increase your after-tax purchasing power in retirement. In effect, $10,000 in a Roth IRA gives you more to spend in retirement than $10,000 in a traditional pre-tax IRA. Remember, taxes could substantially reduce the amount you’re left with when you withdraw from the traditional IRA.
And there’s another reason not to tap your IRA for the conversion taxes: If you’re under age 59½, the amount you withdraw may be subject to a 10% IRS penalty. A cash account may be a good place to get the money to pay the taxes on the conversion.
3. You can lighten the tax burden of a conversion. If you don’t have enough money to pay taxes on converting all your traditional IRA assets, or if doing so would push you into a higher tax bracket, you can consider converting just part of your assets. In addition, a special provision applies to 2010 conversions that gives you the option of postponing the tax bill and paying it off over two years. If you choose this route, taxable income that results from the conversion gets split evenly between 2011 and 2012. But be aware that tax rates are scheduled to go up in 2011, so—barring any new tax legislation—you could end up paying taxes at a higher rate.
4. Penalties may apply if you withdraw within five years of a conversion. A conversion may not be for you if you expect you’ll withdraw the money within five years. Generally speaking, you’ll only be able to withdraw earnings from the account without taxes and penalties if you’re age 59½ or older and you’ve held the Roth IRA for at least five years.As for withdrawals of your original conversion amount, those are tax-free. But to avoid a 10% IRS penalty, you generally must be either at least age 59½ or wait at least five years after your conversion to make the withdrawal.
5. Your heirs may benefit from the conversion. During your lifetime, you don’t have to take money out of the Roth IRA because you’re not subject to RMDs. That means you can leave the entire accumulated balance to someone else. And while a beneficiary who inherits your Roth IRA may be subject to RMDs, he or she can withdraw the amount of your original conversion tax-free. Any earnings are also tax-free, provided that the Roth IRA meets the five-year holding requirement.