In response to Strategy to Contribute More Than Roth IRA Limit Allows I received feedback from a reader, Tony. He thought it would be beneficial if I mentioned some of the rules for Roth IRA conversions. Specifically:
- The income limit for Roth IRA conversions
- Pro-rata tax treatment of the tax-deferred portion of IRAs
Thanks Tony, for pointing these out. Let’s examine them further.
Income Limits
Your modified AGI for Roth IRA purposes cannot be greater than $100,000. You can calculate your modified AGI using publication 590. As I mentioned in the first post, the income limits will be removed in 2010. Until then, the only way to take advantage of the conversion is if your income does not exceed the limit.
Pro-rata tax treatment
When completing the conversion from a traditional IRA to a Roth IRA, you must include a portion of tax-deferred money in the IRA in proportion to the amount held. For example, let’s say I have an IRA worth $100,000, with $50,000 (50%) tax deferred and $50,000 after tax. I complete a conversion of $20,000 to a Roth IRA. I will be responsible for taxes on $10,000, or 50%. You cannot specify to convert only the after-tax money in the account.
Other considerations
There are additional rules to consider when converting. You must complete the conversion within 60 days. You cannot be married and file a separate return. Finally, when evaluating your IRA all accounts are considered one, regardless of what custodian holds the funds.
Find out about the Roth 401k: What Is It?
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There is a 401k Roth feature that my employer is opening up to us starting in 2008. Based on what I’ve been able to learn about it, it doesn’t have any income limits like the Roth IRA has. I still don’t have all the details yet and haven’t decided if I’ll use it; I can’t use the Roth IRA because of the income limits so I’ve been funding a traditional IRA.
RussNovember 15th, 2007 at 5:27 pm
Russ - That is great news! I’ve been trying to encourage my employer to offer the Roth 401k without success. It’s a great retirement vehicle as long as the fees are reasonable. It opens up the doors for those above the income limits of the Roth IRA as you pointed out.
November 15th, 2007 at 9:35 pm