Investing, Retirement 

Google Asks About Roth IRAs

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Google Asks Jim will now be a fictitious series of questions and answers where I, personal finance novice, answer the questions that come in the referrer tags from Google search. In this edition, I hit up six Roth IRA related questions that showed up this week (and were interesting enough to answer).

Can a husband and wife both have a Roth IRA?
Of course! It basically works the same as when you’re an individual except your income phaseouts for 2007 are $156k to $166k if you’re married filing jointly and less if you’re filing separately.

Does a transfer from a Roth IRA to a SEP IRA count as a contribution?
Hmmm… this is an interesting question because I’m not sure a transfer from a Roth IRA into a SEP-IRA is something that makes much sense in the first place. You’ve already paid taxes on the Roth IRA contribution and the SEP IRA is just like a Traditional IRA from a tax perspective… so to withdraw it from a Roth IRA, presumably tax free, and then put it into a deferred tax investment vehicle, the SEP IRA, would be counter-productive. I wouldn’t even consider moving it from a Roth to a SEP, am I missing something?

How do I calculate the Roth IRA phase out contribution?
From my past article on Roth and Traditional IRA contribution limits:

The Roth IRA income phase-out is linear, so if you are Married Filing Jointly, under 50, and your total income were $161,000 (2007), you are permitted to contribute $2,000 (nice catch guys!) to your Roth IRA. There are two special cases though: 1) when calculating your limit, round up to the nearest $10; 2) If your limit is under $200 but still positive, round up to $200.

Does it cost anything to change a Traditional IRA into a Roth?
Yes, you have to pay the taxes on the amount you convert from a Traditional IRA to a Roth IRA. Until 2010, you have to earn less than $100,000 a year in order to convert a Traditional IRA to a Roth IRA. When President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005, it removed that requirement in 2010 making it possible for everyone and anyone to do the conversion. (more on the 2010 IRA conversion loophole)

Can I open a Roth IRA if my employer offers 403b?
Yes, you can open a Roth IRA as long as you are permitted based on the income limitations. In fact, you can open a Roth IRA if your employer offers a 403b, 401k, SEP-IRA, Keogh, etc – it’s totally independent. Now, if your employer offers any of those plans, your ability to deduct contributions to Traditional IRA’s is severely limited.

Can I contribute to Roth IRA and IRA?
You can contribute to a Roth and any other IRA at the same time but they share contribution limits, that means you can put a total of $4k into IRA accounts. So, if you put in $2k into your Roth, you can only put $2k into Traditional, and $0 into a SEP-IRA. If you put in $1k into your Roth, you can put $3k into Traditional. As long as the sum is under that year’s limit and your contribution limit, you’re good. You just can’t go over the annual limit.

{ 12 comments, please add your thoughts now! }

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12 Responses to “Google Asks About Roth IRAs”

  1. tinyhands says:

    Does a transfer from a Roth IRA to a SEP IRA count as a contribution?
    IRS Publication 590- Such a transfer is called a recharacterization and is not treated as a contribution in the tax year of the recharacterization, but the contribution remains applied to the year in which the recharacterized amount was contributed.

    That may be confusing, so here’s an example: Say you made a Roth contribution for the maximum amount allowable in November of 2006. That contribution is clearly for tax year 2006. If you recharacterize the contribution in March 2007, you cannot then go make another TY2006 IRA contribution, even though the IRS still allowed contributions to be made for TY2006 until April 17th. You can still make a TY2007 contribution (up until 15 April 2008).

    The rule effectively prevents you from “double-dipping” your contributions by recharacterizing them.

  2. Dustin says:

    What if I contribute but make too much money?
    Let’s say I am borderline with the cut off of contributing to a ROTH but do not know I will go over the limit for annual income this year. But due to capital gains, inheritance, or some other reason, I do go over. This will put me over the limit for income, but I have already contributed. What happens?

  3. Jacob says:

    Contributions to SEP IRAs don’t count against the total you can contribute to a regular or Roth IRA. From the IRS website:

    Roth IRAs and traditional IRAs. If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.
    This means that your contribution limit is the lesser of:
    $4,000 ($5,000 if you are age 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or

    Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.

  4. Ray says:

    I have some money in 401K through my previous employer and I am thinking of moving to my IRA account. Should I move it to IRA or Roth IRA? Also, will there be a penalty if I move it to Roth IRA?

  5. Mike D says:

    I have a Roth IRA with TD Ameritrade that was opened by my parents when I was in college. I’d now like to transfer it over to Vanguard Roth IRA. Is this possible?

  6. Tim says:

    1. each person can have a combination of RIRA and TIRA up to $4k within your AGI limits.

    2. converted TIRA to RIRA does not count as part of the $4k. you can convert the whole amount if you are within the income limit for the conversion.

    3. the conversion amount is not added into income for the purpose of determining the income limit for conversion (that is, if you want to convert $10k and your MAGI is $85k, you are still eligible to convert from TIRA to RIRA if filing jointly because your MAGI is only $85k)

    4. if you are income is close to any of the AGI limit restrictions, then you will have to recharacterize before the end of the year. first, if filing jointly and you determine that your AGI will be greater than $90k, and you converted TIRA into a RIRA in january, you will need to recharacterize back to TIRA. second, if your AGI is greater than the limits for contributing to an IRA, then you will need to withdraw your IRA contributions before the end of december. recommend making this decision around october to execute in november. if not, the processing time, could result in penalties if you do not recharacterize on time.

    5. if converting for TIRA to RIRA, remember you have to pay taxes on the amount. A good idea is to have a time to determine if it is worth paying taxes on the conversion. my decision point is in october. I converted TIRA to RIRA in january. if the RIRA has not increased in value by october, i will recharacterize. why? no sense in paying taxes on what is essentially a loss–that is, if your RIRA is worth less in october than in january, you are paying taxes on a loss.

    6. you do not have to convert the entire amount of TIRA into a RIRA. you can do a partial conversion.

    7. as of now you cannot convert a 401K directly into a RIRA. you have to convert to a TIRA first, then convert from TIRA to RIRA. in 2010 you will be able to directly convert from 401K to RIRA.

    8. Mike, yes, you can transfer your RIRA from TD Ameritrade to Vanguard RIRA. just look at Vanguard’s website or call and they wil explain. it is simple, just ensure you are aware of the fees associated with it.

    9. if contributing to IRA in the jan-apr time period, remember to specifically annotate the tax year for the contribution. you will be assessed a penalty if you over contribute to an IRA.

    10. it is important to know the deadlines for conversion, withdrawals, and contributions.

  7. Tim says:

    last comment: if you are married, and one spouse does not have income, you can still contribute to both your and your spouses IRA, so long as you earn the minimum requirement to cover both IRA’s and again do not have AGI greater than the ceiling.

  8. tinyhands says:

    Dustin – You must remove the excess contribution and any gains attributable to it. You may recharacterize the contribution as a traditional IRA contribution (which may or may not be deductable, likely not). If you simply withdraw your contribution, you’ll pay taxes now on the gains attributable to it (which you must also withdraw). The easiest going-forward solution to this is not to contribute to your 2007 IRA(s) until 2008 when you know how much you made in 2007.

    Ray – It is usually in your best interest to move the money out of the employer’s 401k so that you can invest and diversify it yourself. Exceptions are when you only have a tiny bit of money or if your former employer has an exceptional (and cheap) plan. Rollovers go into Traditional IRAs (unless your 401k is a Roth 401k, which are not common) and there are no fees or penalties. There are no direct rollovers to Roth IRAs (except as before with a Roth 401k) so you’ll be penalized 10% (assuming you’re under age 59 1/2) and pay your marginal tax rate, plus you’ll (likely) be penalized for excess contributions to the Roth. Bad idea, so you probably want to go with a rollover to a traditional IRA (aka rollover IRA).

    Mike – Yes, this is both possible and easy because an IRA is an IRA no matter where the account is held. It is called a change of custodian. Your current custodian (TD) may charge you a small account transfer fee ($50), so ask yourself why you really want to do it.

  9. Tim says:

    tinyhands and Ray,
    tinyhands erred or was a little unclear in advice given in regards to conversion to RIRA. you are not penalized 10% nor penalized for excess contribution to RIRA if you rollover 401K to TIRA then convert from TIRA to RIRA. you will, though, have to pay taxes on the amount converted to RIRA since you have not paid taxes on them (i.e. 401K was pre-tax and TIRA is pre-tax). You must ensure you meet the max AGI limit to convert to TIRA. the rollover to TIRA and the conversion to RIRA do not count toward to $4k annual contribution limit. It is separate. so you could rollover your entire 401K to TIRA and then convert entire TIRA into RIRA and still contribute $4k to your IRA for the year. moreover, the amount you rollover or convert does not get added into your AGI in determining eligibility to convert to RIRA.

    just ensure that if you do convert to RIRA to est. a decision point for recharacterization if needed–that is, one, if your AGI is higher than the limit for conversion; two, if your converted RIRA is worth less towards the end of the year versus the period you converted.

  10. tinyhands says:

    Agreed, I was unclear. I was envisioning taking a distribution from the 401k without having the appropriate destination account(s) in place, then trying to deposit the funds in their entirety.

  11. Ray says:

    Tim and tinyhands,

    Thanks to both you guys. I appreciate your taking the time to clear this out for me.

  12. Rich says:

    Now my 401K has decreased to 201K(lost half of the value), how much do I use to calculate my tax ?. I understand that I will have to use two steps. First convert my 401K to a rollover IRA, then convert the rollover IRA to Roth. The 401K actually lost the value to 1/2 of the basis of 401K(the amounts the employer contributed and my deferred salary amount). Originally was $25,000 but now the account is $12,500. Do I pay the tax on 25,000 or 12,500?

    Thank you my name is Rich but I am not rich

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