Comments on: 401(k), Roth IRA, then Back at 401(k) http://thefinancebuff.com/401k-roth-ira-then-back-at-401k.html like a friend telling you about money ... Sun, 20 May 2012 11:06:24 +0000 hourly 1 http://wordpress.org/?v=3.1.2 By: TFB http://thefinancebuff.com/401k-roth-ira-then-back-at-401k.html#comment-5037 TFB Sun, 24 Oct 2010 21:05:30 +0000 http://blog.thefinancebuff.com/?p=16#comment-5037 Andy - When you are married filing jointly, the eligibility to contribute to a Roth IRA is calculated against the combined adjusted gross income between the two of you. If your combined AGI exceeds <a href="http://www.irs.gov/retirement/participant/article/0,,id=188238,00.html" rel="nofollow">the limit</a>, neither of you can contribute to a Roth IRA. You can "recharacterize" the contributions as Traditional IRA contributions. Your IRA custodian have forms for doing so. They will open a traditional IRA for each of you and put the contributions plus a little bit of earnings into the traditional IRAs. The resulting traditional IRA contributions may or may not be deductible. It depends on whether you are covered by a retirement plan (such as a 401k) at work. If you are covered by a retirement plan at work, you can't take a deduction because the income limit for taking a deduction is lower than the income limit for contributing to a Roth. If you not covered by a retirement plan at work, the contributions are deductible. If you are able to deduct the contributions, you can just leave the money in the Traditional IRA. If you can't take a deduction, *and if you don't have other traditional, SEP, or SIMPLE IRAs*, you can convert the Traditional IRAs to Roth. You will pay a little bit of tax on the earnings, but not much. If you are in this situation, in a round-about way through recharacterizing and converting, you are back to Roth IRAs. This is called a "backdoor Roth." The key is not having other traditional (including rollover from previous 401k type plans), SEP, or SIMPLE IRAs. Andy – When you are married filing jointly, the eligibility to contribute to a Roth IRA is calculated against the combined adjusted gross income between the two of you. If your combined AGI exceeds the limit, neither of you can contribute to a Roth IRA.

You can “recharacterize” the contributions as Traditional IRA contributions. Your IRA custodian have forms for doing so. They will open a traditional IRA for each of you and put the contributions plus a little bit of earnings into the traditional IRAs.

The resulting traditional IRA contributions may or may not be deductible. It depends on whether you are covered by a retirement plan (such as a 401k) at work. If you are covered by a retirement plan at work, you can’t take a deduction because the income limit for taking a deduction is lower than the income limit for contributing to a Roth. If you not covered by a retirement plan at work, the contributions are deductible.

If you are able to deduct the contributions, you can just leave the money in the Traditional IRA. If you can’t take a deduction, *and if you don’t have other traditional, SEP, or SIMPLE IRAs*, you can convert the Traditional IRAs to Roth. You will pay a little bit of tax on the earnings, but not much.

If you are in this situation, in a round-about way through recharacterizing and converting, you are back to Roth IRAs. This is called a “backdoor Roth.” The key is not having other traditional (including rollover from previous 401k type plans), SEP, or SIMPLE IRAs.

]]> By: Andy http://thefinancebuff.com/401k-roth-ira-then-back-at-401k.html#comment-5033 Andy Sun, 24 Oct 2010 03:49:47 +0000 http://blog.thefinancebuff.com/?p=16#comment-5033 I have a question related to Roth IRA, though not directly related to this particular topic. I have been contributing to my wife's and my own Roth accounts (my wife doesn't work), around $400/month for each account throughout this year. An unexpected income (a one-time cash dividend from the startup company I'm working for) pushed my income over the income limit. What should I do in this case? Do I just withdraw the money I've put into the account that's designated for 2010 (just principle or gain too)? Will there be any penalty? Any special process I need to go through? I have a question related to Roth IRA, though not directly related to this particular topic. I have been contributing to my wife’s and my own Roth accounts (my wife doesn’t work), around $400/month for each account throughout this year. An unexpected income (a one-time cash dividend from the startup company I’m working for) pushed my income over the income limit. What should I do in this case? Do I just withdraw the money I’ve put into the account that’s designated for 2010 (just principle or gain too)? Will there be any penalty? Any special process I need to go through?

]]> By: sewall http://thefinancebuff.com/401k-roth-ira-then-back-at-401k.html#comment-1704 sewall Thu, 12 Mar 2009 14:40:23 +0000 http://blog.thefinancebuff.com/?p=16#comment-1704 The IRA contribution limits rise over time. As of 2009 they're $5k per individual per year. There are other reasons not mentioned above to stuff as much in one's Roth as one can (after getting the company 401(k) match): (1) it is reasonable to expect all our tax rates to go up (US is taking on tremendous debt), thus, in general one should pay taxes now and not in retirement (the ordering of individual tax rates may, of course, be reversed); (2) There are no RMDs for Roths. You won't be forced to start taking your money out when you reach 70.5. You can leave it there until you need it; (3) You can withdrawal your contributions anytime without penalty. It isn't a great idea to go raiding your Roth. But, if you need to, you can do so without a penalty. This latter point makes it hard to justify not maxing out one's Roth. It takes special and generally rare circumstances for which it is not a good idea. The IRA contribution limits rise over time. As of 2009 they’re $5k per individual per year.

There are other reasons not mentioned above to stuff as much in one’s Roth as one can (after getting the company 401(k) match): (1) it is reasonable to expect all our tax rates to go up (US is taking on tremendous debt), thus, in general one should pay taxes now and not in retirement (the ordering of individual tax rates may, of course, be reversed); (2) There are no RMDs for Roths. You won’t be forced to start taking your money out when you reach 70.5. You can leave it there until you need it; (3) You can withdrawal your contributions anytime without penalty. It isn’t a great idea to go raiding your Roth. But, if you need to, you can do so without a penalty. This latter point makes it hard to justify not maxing out one’s Roth. It takes special and generally rare circumstances for which it is not a good idea.

]]> By: goldi http://thefinancebuff.com/401k-roth-ira-then-back-at-401k.html#comment-362 goldi Mon, 31 Dec 2007 15:11:00 +0000 http://blog.thefinancebuff.com/?p=16#comment-362 There is a great book dedicated to this topic called "It's Your IRA". It is an excellent resource for those wanting to learn more about investing in Roth and Traditional IRAs. It is available through Amazon or you can go to ItsYourIRA.com for more details. It is definitely worth a look. There is a great book dedicated to this topic called “It’s Your IRA”. It is an excellent resource for those wanting to learn more about investing in Roth and Traditional IRAs. It is available through Amazon or you can go to ItsYourIRA.com for more details. It is definitely worth a look.

]]> By: TFB http://thefinancebuff.com/401k-roth-ira-then-back-at-401k.html#comment-8 TFB Tue, 31 Oct 2006 15:51:00 +0000 http://blog.thefinancebuff.com/?p=16#comment-8 If you don't have access to a 401k/403b type plan, then you have to invest in a regular mutual fund account, after you maxed out the 4k for IRA, either Traditional or Roth depending on your tax bracket -- high tax bracket traditional, low tax bracket Roth. If you don’t have access to a 401k/403b type plan, then you have to invest in a regular mutual fund account, after you maxed out the 4k for IRA, either Traditional or Roth depending on your tax bracket — high tax bracket traditional, low tax bracket Roth.

]]> By: Dogberry http://thefinancebuff.com/401k-roth-ira-then-back-at-401k.html#comment-6 Dogberry Tue, 31 Oct 2006 06:09:00 +0000 http://blog.thefinancebuff.com/?p=16#comment-6 I could not figure out what they meant by putting more in a traditional IRA either. <br/><br/>A question that I am considering. If you don't have access to a 401k then what should you do after you have maxed out the 4k of a Roth IRA?<br/><br/>Dogberry<br/><a HREF="http://money-and-investing.dogberrypatch.com/" REL="nofollow">Money & Investing Dogberry Patch</a> I could not figure out what they meant by putting more in a traditional IRA either.

A question that I am considering. If you don’t have access to a 401k then what should you do after you have maxed out the 4k of a Roth IRA?

Dogberry
Money & Investing Dogberry Patch

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