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Old 03-28-2015, 11:50 AM
 
Location: Long Island
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I know that Roth IRA's have income limits attached to them and that they're based on MAGI. I'm a little iffy on what's included in that number though, even after reading several explanations. Can anyone be of help?

My husband and I each have an IRA, and I also have a 401K. His company does not offer one, so we put the maximum in his traditional IRA. I was putting 10% of my income in my company's traditional 401K. I've recently been able to increase that so that I'm putting the max amount(~18K? I'm under 50) per year. In the last year or so, I started putting 2% into a Roth 401K as well. I'm somewhat concerned because I know there's a penalty on the Roth IRA if you're over income limits. Both my husband and I sometimes gets bonuses, and he occasionally gets commissions as well. If we're under the income limit as I contribute, but end up over by year-end, how does that work? I understand that we should really think about contributing more to the Roth because of the potential tax rate on the traditional as we withdraw, but I'm stuck on this point. I also have to get over the immediate gratification thing on the tax deduction.

Any help is greatly appreciated.
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Old 03-30-2015, 05:42 PM
 
2,409 posts, read 2,648,563 times
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Quote:
Originally Posted by OnOurWayHome View Post
I know that Roth IRA's have income limits attached to them and that they're based on MAGI. I'm a little iffy on what's included in that number though, even after reading several explanations. Can anyone be of help?

My husband and I each have an IRA, and I also have a 401K. His company does not offer one, so we put the maximum in his traditional IRA. I was putting 10% of my income in my company's traditional 401K. I've recently been able to increase that so that I'm putting the max amount(~18K? I'm under 50) per year. In the last year or so, I started putting 2% into a Roth 401K as well. I'm somewhat concerned because I know there's a penalty on the Roth IRA if you're over income limits. Both my husband and I sometimes gets bonuses, and he occasionally gets commissions as well. If we're under the income limit as I contribute, but end up over by year-end, how does that work? I understand that we should really think about contributing more to the Roth because of the potential tax rate on the traditional as we withdraw, but I'm stuck on this point. I also have to get over the immediate gratification thing on the tax deduction.

Any help is greatly appreciated.
If you are concerned about over-contributing to the Roth accounts, you can contribute to Traditional accounts instead and convert the money to Roth later.
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Old 03-30-2015, 06:04 PM
 
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If you have existing deductable ira's this will not work well.
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Old 03-30-2015, 08:42 PM
 
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Originally Posted by mathjak107 View Post
If you have existing deductable ira's this will not work well.
How so?
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Old 03-31-2015, 12:02 AM
 
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You are mixing taxed and untaxed monies I guess is his thought so it is difficult to track the return rate on investments
But you can have 2 IRAs
One you use to just capture your taxed IRA portion b4 converting into Roth
One that has pre-tax contributions plus gains
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Old 03-31-2015, 01:16 AM
 
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Originally Posted by loves2read View Post
You are mixing taxed and untaxed monies I guess is his thought so it is difficult to track the return rate on investments
But you can have 2 IRAs
One you use to just capture your taxed IRA portion b4 converting into Roth
One that has pre-tax contributions plus gains
this is not how it works at all.

once you have deductable and non deductable ira's it is looked at as one big mix even if seperate accounts. .

Let's say you have non-deductible contributions of $8,000 and a Traditional IRA that have both grown to $100,000. The taxable amount would be based on a combination of the two if you convert. you can't cherry pick and move the non deductable money only.:

(8,000/100,000) = 8% of the total would be allowed to be converted tax free or only 640 dollars.

Of the $8,000 that you convert, $7,360 would be taxable ($8,000-640=$7,360).


a work around is if you can transfer the deductable ira money in to a 401k if allowed and just leave the non deductable ira. but plan rules may not allow it or your money may now be stuck in the 401k.

Last edited by mathjak107; 03-31-2015 at 01:24 AM..
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Old 03-31-2015, 02:54 AM
 
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Originally Posted by AmFest View Post
How so?
see above post ,

so many folks mess this up up because they think they can cherry pick only the non deductable ira money and convert that money only.

but that is not how things work when you have other ira's and have already existing money where you took the deduction.

to the irs it is all just one big mix.
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Old 03-31-2015, 07:14 AM
 
2,409 posts, read 2,648,563 times
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Quote:
Originally Posted by mathjak107 View Post
this is not how it works at all.

once you have deductable and non deductable ira's it is looked at as one big mix even if seperate accounts. .

Let's say you have non-deductible contributions of $8,000 and a Traditional IRA that have both grown to $100,000. The taxable amount would be based on a combination of the two if you convert. you can't cherry pick and move the non deductable money only.:

(8,000/100,000) = 8% of the total would be allowed to be converted tax free or only 640 dollars.

Of the $8,000 that you convert, $7,360 would be taxable ($8,000-640=$7,360).


a work around is if you can transfer the deductable ira money in to a 401k if allowed and just leave the non deductable ira. but plan rules may not allow it or your money may now be stuck in the 401k.
And how does it not work well? If the OP had contributed to the Roth he would have had to pay taxes on the whole 8k.
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Old 03-31-2015, 07:31 AM
 
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it does not work well because folks think they can take the 8k they put in a non deductible ira and already funded with after tax money and just convert it to a roth with no further taxes on the conversion .

that only works that way if you own no other ira's with money you already deducted. in this case they would have already paid the taxes on the 8k put in the non deductible ira and still owe taxes on 7460.00 which they likely didn't expect on the conversion. .

Last edited by mathjak107; 03-31-2015 at 07:48 AM..
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Old 03-31-2015, 07:46 AM
 
2,409 posts, read 2,648,563 times
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Quote:
Originally Posted by mathjak107 View Post
it does not work well because folks think they can take the 8k they put in a non deductible ira and already funded with after tax money and just convert it to a roth with no further taxes on the conversion .

that only works that way if you own no other ira's with money you already deducted. in this case they would have already paid the taxes on the 8k put in the non deductible ira and still owe taxes on 7460.00 which they likely didn't expect .
Ah that's terrible. I guess that's the potential problem with backdoor Roth IRA.
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