Related: Roth IRA Conversion and Traditional vs. Roth IRA: An Introduction and Comparison
The total contribution limit for IRAs is not changing in 2009. Just like 2008, the maximum you can contribute to your IRAs across both Traditional and Roth types is $5,000. Anyone who becomes 50 years old this year has a higher maximum of $6,000. Keep in mind that this maximum is across IRA types, so if you’re 49 years old and have already invested $4,000 in a Roth IRA, you can only add $1,000, whether the amount is invested in a Traditional IRA, Roth IRA, or split between the two.
The phase-out ranges for Roth IRAs change this year. If your modified adjusted gross income (MAGI), a specific calculation on the 1040 tax form, is above $105,000 for single filers or above $166,000 for those who are married filing jointly, your maximum allowable Roth IRA contribution begins to reduce to zero. If your MAGI is above $120,000 (single) or $176,000 (married filing jointly), you do not qualify for Roth IRA contributions.
If you haven’t contributed to your 2008 IRA, don’t panic. You have until your tax filing deadline to fund your 2008 IRA. I haven’t contributed to my 2008 Roth IRA yet. I need to calculate my MAGI first in order to determine my maximum contribution amount.
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{ 60 comments… read them below or add one }
“If your MAGI is above $120,000 (single) or $176,000 (married filing jointly), you do not qualify for IRA contributions. ”
This statement is not 100% correct. If you exceed the income limits you may still contribute to an IRA. The difference is that your contributions will be after tax contributions. However, you may want to make this contribution anyway because even if you are ineligible for a Roth IRA now (due to income limitations), that restriction disappears in 2010. Thus, if you have a conventional IRA now (even if funded with taxed contributions), you can convert that to a Roth IRA in 2010, making all of your withdrawals non-taxable. That is what I am doing.
I contribute the maximum to a company 401K plan. How much could I contribute to a Roth IRA if I opened one?
@Rick
Contributing to a Roth IRA is more subject to your AGI (Adjusted Gross Income). That will determine whether your eligible to contribute to a Roth. If you exceed the income threshold, you may want to consider contributing to a nondeductible IRA for 2008 and 2009 and then converting them both in 2010.
Thanks for your answer. It is good to have blogs like yours to remind us about these things.
My husband will turn 50 in August, 2009. Can he deposit $6000 this year or is he still limited to the $5000?
I’m about to set up our automatic contributions for the year so thanks for your help.
Heidi
@Heidi
You are allowed to take advantage of the catch up in the calendar year that you turn the age of 50. So yes, go ahead and adjust for the $6000 contribution for the year.
I have several Traditional IRA’s and a Roth IRA. Because of the income limits, I have not contributed to the Roth IRA in several years…. The above comments suggest to convert Traditional IRA’s to Roth IRA’s in 2010 (no income limits in 2010). If we DO that, won’t we have to pay taxes on ALL our interest or profit… in other words everything our Traditional IRA’s earned throughout the years????
@ Bill-
In most cases, you are absolutely correct. For the 2010 Roth IRA Conversion event, the IRS is making a special exception. The taxable gain is not all due in 2010 (actually payable by April 15th in 2011). The IRS will allow you to spread the tax over a two year period; 50% in 2011 and 50% in 2012.
That way the tax bill does not hit you all at once. Hope that helps!
Please correct me if I’m wrong, but I thought I recently read that the “catch up” dollar amount for the year 2009 was increasing by $500. In other words a person contributing the over 50 catch up amount would now be $6,500. Please let me know if I’m in correct. Thanks
@ Donna
You are almost correct. The catch up contribution will increase by $500 but that does not begin until 2010.
My adjusted gross income in 2009 should be about 110,000. How much can I put in my Roth IRA in 2009?
@ Michael
Are you filing as an individual or joint? That will make a difference. I have the formula for you to calculate based on what filing status you fall under. http://www.goodfinancialcents.com/2009-roth-ira-phase-out-limits/ (Flexo, I apologize if this against your comment policy)
I am filing single.
my concern: is there is a maximum % of income allowed to put toward IRAs?
Do I still qualify to invest the full $5000 ROTH IRA amount if:
1. laid off, with annual income under $15,000
2. retired (over 65) with no income
@ Lola
1. No maximum % of income, but you can only contribute to what you make. For example, if your income for the year is $4000, you can only contribute $4000.
2. I just kind of answered #2 above. You can only contribute to an IRA (Roth or Traditional) if you have earned income.
None of my business, but not sure if 1. your laid off or 2. retired with no income, if investing in a Roth IRA makes sense?
I made my Roth IRA contributions for 2008 back in January 08, but I just realized I do not qualify for this year. Like the overall market, my Roth investment lost a significant part of its worth over the past year. Everything I read so far mentions the treatment of gains on excess contribution but none mentions losses, so I have two questions:
1. Does that count as capital loss deduction if I transfer the excess contribution to a taxable account?
2. Since the current value of my investment is less than the amount originally invested, do I have to liquidate my prior year contributions to bring it up to the original $5000 or do I just need to transfer the current value of the original investment?
I am 72. Can I convert my traditional IRA to a Roth for 2008 up until April of this year?(2009) If so, do my required minimum distributions I have taken in 2008 count as part of my adjusted gross income to determine if I meet the income eligibility for a Roth or are those distributions exempt from that calculation? Thanks
@ Excess
1. The only way to generate a capital loss in your Roth IRA is to liquidate all your Roth IRA holdings, not just the 2008 contribution. If that is your only one, then you may be entitled to take the loss. Based on your second question, it looks as though you will not be entitled to the loss.
2. The investment/brokerage firm should be able to figure out what is the current value of the $5000 2008 contribution. The current depreciated value is all you have to take out. For example, if what you invested in is only worth $3000 today, $3000 is all you have to take out.
@ Jerald
You have to convert in the “calendar” year not the tax year, so you missed the boat for 2008.
I realize now that you have to have EARNED income to make a contribution to a Roth or regular IRA. Is that also true for a non deductible IRA?
@ Pat
Yes, same rule applies.
I contributed $5000 to my Roth IRA in 2008 and have maxed out my contributions over the last 6 years. In January of 2009, I needed some cash to refinance my house and withdrew $8000 from my Roth IRA. I am now in a position to again contribute to my Roth. My question is – how much can I now contribute…in both 2008 and 2009?
If I act before April 15th, can I pay the $8000 back, which would result in a net 2008 contribution of $5000?
Or since the withdrawal took place in 2009, does that effect my 2009 contribution limit? Can I then contribute $13000 in 2009, which results in a net 2009 contribution of $5000?
Or am I not allowed to pay back withdrawals? Then, I would be considered maxed out in 2008 and the most I could contribute in 2009 is $5000.
I’m in a unique positon and can’t sem to find any answers. Please advise. Thanks
@ Josh
That is a very unique situation. When you take a distribution from an IRA, you have what’s called the 60 day “borrow rule” http://www.goodfinancialcents.com/borrowing-against-your-ira. Keep in mind that’s 60 days from when you took the distribution. If you are looking to replenish the funds you withdrew, I suggest you deposit them immediately. That means that your 2008 contribution would be satisfied, but you would then need to deposit another $5k for your 2009 contribution.
Hope that helps!
Jeff, great stuff here. Quick question: have a Roth IRA and contribute the max of $5K and understand that you CAN in fact contribute to both a Roth IRA and a traditional IRA as long as the total does not exceed $5K, but would a “non-deductible IRA” count as part of the $5K limit or not? I would like to be able to do the $5K Roth & $5K non-deductible IRA with an eye towards converting the non-deductible to my Roth in 2010.
@ Forrest and Jennifer
You are correct on the ability to contribute to both a Roth and traditional so as long as you don’t exceed the $5k limit (for under the age of 50). Unfortunately, the nondeductible IRA goes towards this as well. So, no, you won’t be able to do what you hoped. I like the way you think though!
Jeff –
this is a weird situation that I’ve not seen addressed elsewhere. I contributed the fully-allowable $5K to my ROTH IRA in 2008. Then, to make a long story short, my husband was bought out of his job in late 2008 – which resulted in an unexpected flurry of stock options exercised, retention bonuses earned, etc. This windfall caused his annual earnings to exceed that of the ROTH contribution threshhold.
We realize that basically the $5k contributed to my ROTH is considered to be an excess contribution – and that there will be an income tax penalty on that money. Our thoughts were to take the $5K that was contributed in 2008 out of the ROTH and then open up a Traditional IRA. Is that allowable??? I’m having difficulty finding any information about doing this – everything I’m finding seems to be about converting Traditional funds to ROTH!
Thanks!
Just to give you a quick answer…. I had a similar scenario in 2006. I had already contributed to my Roth IRA, then sold 2000 shares of (previous) company stock….. putting me OVER the income limit for the Roth IRA….. What I had to do and what you will need to do is called a “recharacterization” of the funds, basically taking the contributions for 2008 FROM your Roth IRA and placing them into a Traditional IRA. It’s actually a pretty simple process, but I THINK the recharacterization MUST take place before April 15 of this year!!!
Jeff can fill you in with the details in case I’ve left anything out.
What IRS forms do you need to file if you do a recharacterization? In some places I’m seeing a 8606 and in others a 1099.
Jeff,
I have taken an 80% loss on my total ROTH this past year. Here is my question. If I close out my ROTH to take the tax loss can I then add an additional $5000 to a new ROTH account for 2008 tax year or can I add the $5000 to a traditional IRA instead for year 2008 if my agi makes it possible or will I instead have to allocate it to 2009 tax year. Second question, am I able to take the loss on my 2008 taxes since it is after December 31 or does the IRA use the April 15 date of the next year as a closing date for these purposes and I will have to wait till next tax year to file this loss?
Thanks
@ Archer. Bill is right on. That’s exactly what you need to do.
@ Patick. Same as Archer’s Situation. Once you made a contribution to the IRA, that’s your contribution for the year. The IRS will have a record of the contribution so you would not be able to cash out and recontribute. To take a loss you would have had to cash out in the calendar year, not the tax year. You are still able to do a recharacterization, keeping in mind that it will only be for the current value.
The only way you would be able to take a loss would be to completely cash out your total IRA balances which wouldn’t make sense if you plan on contributing for 2009.
Great info! I’m married, filing jointly. My wife has no income apart from mine. Are we (together) limited to the $5,000 limit on Roth IRA contributions? Can we put in $10,000 together in a single Roth…or could we each contribute $5k to a Roth?
Jeff:
My situation is similar to Patrick’s with a twist. If I have a Roth 401(k) and a Roth IRA, do I need to cash both out in order to take a tax loss or can I just cash out the Roth IRA? Obviouly, I’d rather not do this at all but other circustances may require me to do this for 2009.
Thanks!
@ MIke. You should be good on the Roth 401k. Although they both have “Roth” in them, the are technically both covered under different IRS code.
@ ed DaMan Provided you don’t exceed the income phaseout limits (phaseout begins at $166,000), you could then make a Roth contribution on each other’s behalf. The would have to be separate, because they are Roth “Individual” Retirement Accounts. But as long as you have income that exceeds 10k, you are allowed to open an IRA for your nonworking spouse.
@ Jeff Rose re: ed DaMan’s situtation.
Assume same circumstances and not exceeding the income phaseout limits, EXCEPT the wife is self-employed making about $10,000 for the year and puts the maximum that she can into an Individual 401(k).
My understanding is that she can still contribute up to the maximum annual limit to her Roth IRA without regard to her 401(k). The total of all contributions to Roth IRAs and individual 401(k) is less than the earned income of the couple.
Do you also see it that way?
@ Jeff in CA (Nice name by the way)
If I think I interpret your question correctly, your wife is self-employed and contributes her entire income into an individual 401k (I interpret that as a solo-401k), so in effect she reports no income. As long as your income doesn’t exceed the phaseout limits then she’ll be able to have a Roth based on your income.
Another way of answering your last question is that the most an individual can invest into all retirement plans (without advanced planning) is $49,000. That’s Roth IRA, SEP IRA’s, Solo- 401k’s, etc. I think I answered your question, if not give me another shot.
You interpreted that as I intended. And that was exactly my question. Thanks for your answer!
As a variation of ed DaMan’s question, my wife and I are both over age 60. I earned $1,000 and she $10,500 in year 2008. She can make a 2008 contribution of $6,000 to her Roth IRA . Can I “use” the remaining earned income “balance” and contribute $5,500 to my Roth IRA or do I have to limit my contribution to $1,000??
Does a $12,000 earned income minimum, if both are over age 50, come into play since we are both over 60??
Our MAGI for year 2008 is less than $149,000.
Jeff and Bill –
thank you so much for the info – I appreciate it!
I do not have any IRA plans. Could you provide a link where I can see differences between Roth and Traditional, and what should I do after a choosing a plan?
Thank you
George: Check Consumerism Commentary again tomorrow morning after 8:00 am ET. I will have an article describing the differences between Roth and Traditional and some tips for getting started.
Do capital gains in a traditional IRA count against the limit you’re allowed to invest each year? i.e., I overinvested accidently, so now I need to remove some before April 15th. 1) Am I going to get penalized for removing my excess (can I do anything I want with that money, or do I have to turn around and put it in another investment account?). 2) Do I have to take into account the capital gains when I’m looking at how much excess to remove (say I invested $6000 instead of my limit of 5000, then I got capital gains of $90… for a total of $6090 in my account in 2008… do I need to remove $1000 or $1090)?
Thanks.
I understand you need earned income to invest in a Roth IRA. Does severance pay and unemployment benefits consider as earned income?
@ Lamar. Severance pay is. Unemployment is not.
I am married and filed jointly. In 2007 I received a distribution from a deferred compensation plan – box 11 contains same amount as box 1 on W2 for 07. My wife made $708 earned income. I contributed what I now believe is an excess amount of $5000 into my and $5000 into my wife’s IRA accounts and purchased stocks. The stocks are now worth about $3500. I have not yet filed my 08 return.
What should I do….
1. Withdraw $5000 from my and $5000 from my Wife’s account. Do I need to sell the securities.
2. Withdraw $4292 from each account as my wife made $708. Do I need to sell the securities.
3. Can I leave the securities there and pay the penalty 6% and consider the excess as non-deductible
contribution
Are there other options………Thanks a lot
For 2008, I contributed to my Roth IRA account however I am not qualified to do so. Do I need to remove the excess before April 15th, 2009? Do I still need to file Form 8606 if the excess is removed? Will I be penalized for any capital gains in the Roth IRA account, even though the gains occur prior to 2008? I also contributed to 2009 as well, should I remove the excess or leave it since I don’t know right now if I am qualified to make any contribution for 2009 or not? Thanks for the advice.
hello!
I am Yanet and I am 19 years old. I do not understand about the Roth Ira’s system, Can you explain me it please. Also, can you help me with the formulas to do it. thanks
My husband over-contributed (by $4,000!) to his Roth tonight (4/15). By the time we discovered the error, it was too late to do anything about it online or by phone. Will he have a 6% penalty on the excess contribution? Can he move the excess to a regular IRA on 4/16, or convert some to a 2009 contribution?
I’m self-employed and make regular contributions to a SEP up to the allowable 10% limit. Am I able to make additional contributions to a traditional IRA? Are there any “SEP/Traditional combination” limits?
My wife has no income. We’re both over 55, filing jointly with income well in excess of the $166,000 IRS IRA limits. I can contribute $6,000 to my conventional IRA but can I contribute the same to hers?
@Tom – Yes, both you and your wife (as long as she’s over 50 years old as well) can contribute the maximum of $6,000. The contributions can not be tax deductible if your MAGI is in excess of $176,000.
However, in 2010, the income limits on Roth IRA conversions disappear.
So next year, you can convert this year’s Traditional IRA to Roth IRA and realize the benefits of a Roth. However, please note that if you’ve made past tax deductible contributions to a Traditional IRA, those contributions will have a taxable impact on your conversion even if they aren’t a part of the conversion you undertake…
Why?
Since the IRS views your IRA as a single IRA (even though it may be spread across multiple separate financial accounts), it treats the contributions on a partial conversion as a percentage of the whole. So if 50% of your contributions were tax deductible and the rest weren’t, your conversion will be taxed accordingly, even if the converted funds were non-tax deductible themselves.
I have funds in a Roth IRA from 2006-7 contributions (I made less than 100k ) but I made more than 120k (single) in 2008 and will in 2009, as well. I am not contributing to my Roth IRA any more but I do have a portion of my 401k deductions to a Roth IRA (which I’ve heard is okay as there are no income limits to contribute to a 401k Roth IRA?) Questions:
1. Is it okay that I leave the funds in the Roth IRA now that I make more than 120k?
2. Can/should I convert any of my traditional IRA funds to Roth IRA? Does the income limitation apply to conversions as well?
3. Is it okay for me to contribute to a 401k Roth IRA? What is the limit – if any? Is there really a difference on income limits on Roth IRA vs. 401k Roth IRA?
Thanks!
@Sandra – I’ll try to answer each of your questions as you’ve asked them…
1. Yes. It’s okay to leave the funds you’ve already contributed to your Roth in your Roth IRA even though you now earn more than the Roth IRA income limits allow. The income limits are for making NEW contributions. So you can leave your Roth IRA funds alone to grow tax free forever!
2. The question of whether or not you should convert your Traditional IRA to a Roth is more of a personal question. Consult a tax advisor to find out what the advantages and disadvantages are for your particular situation. As for income limits, in 2010, all income limits for making a Roth IRA conversion disappear. So that should NOT be a problem.
3. There is no income limit for making contributions to a Roth 401k. Your contribution is treated under the same rules as a regular 401k contribution except that its made with after-tax funds (it’s not tax deductible). And, of course, your withdrawals in retirement are tax free.
Here’s what the IRS website states in regard to the Roth 401k:
“Do the same income restrictions that apply to Roth IRAs apply to designated Roth contributions?
No, there are no limits on an employee’s income in determining if he or she can make designated Roth contributions. Of course, the employee has to have salary from which to make any 401(k) or 403(b) deferrals.”
I hope this information helps.
I want to convert $20,000 from tradional IRA to ROTH IRA. I know I will have to pay taxes on the money. Will it be taxed at the same rate as my earned income for 2009 ? Will I still be able to
make a contribution to my ROTH IRA for 2009 ? Do I have to convert the whole amount or a little at a time ? Is there a time limit on converting from standard IRA to ROTH IRA ? thank you
@ christy
If you convert in 2009, yes you will be subject to the same tax rate as your earned income for the year.
If your earned income does not exceed the Roth IRA phaseout limits, you can still contribute to a Roth IRA. The conversion will have no affect.
You can convert as little or as much as you want. There is no rule on this or any time limit.
I have some more information on the Roth IRA conversion here:
http://www.goodfinancialcents.com/2010-roth-ira-conversion-rules/ and http://www.goodfinancialcents.com/roth-ira-conversion-traditional-401k-2010/
The whole process can be tricky. Make sure you have a tax professional helping you every step of the way ;-)
Are IRA distributions taxable this year–2009? I heard a rumor they arent because of the state of the economy.
Bob Howard
I am not sure if you answered this before but if I am contributing monthly to my roth ira and do well in my business this year (make 200K +), how do I recharacterize my roth ira (including the gains that I have already made this year) to an IRA that I might qualify for. I work with Fidelity. Would they have a form to transfer to a different account? How exactly is this taken care of?
Thanks,
Marcus
I just realized that I made excess contributions to my IRA accounts for tax year 2008. I’m only allowed 5K but I contributed 4K to a traditional IRA account as well as 2K to Roth IRA account. What is the best way to correct this with minimum tax penalty?
Thanks,
SL
I just STOPPED contributing to my 401k at work and opened a Roth IRA on my own instead. I’m 43 and make $36,000/year. I contributed about $3000 to my 401k for 2009. How much can i contribute to my new Roth IRA for 2009? Does the 401k have anything to do with the limit?
I currently have $11,000 in my traditional ira and am thinking of converting to a roth ira. Since I’ve already contributed $4,000 to my traditional which is deductible, does that net with the $11,000 I’m converting? So that at the end of the year, I’ll only have to pay taxes on $7,000? Is that how it works?
Thanks!
@ SKN
Instead of attempting to explain, check out a post I did that walks you through the conversion process: http://www.goodfinancialcents.com/2010-traditional-ira-to-roth-ira-conversion-tax-rules/
Let me know if you have any other questions.
I have two daughters whom I have have been advising to make maximum contributions to their Roth IRA s.One has been doing so each year until now. Her entire earning are unemployment benefit so she is not eligible this year.The other has made no contributions since she lives with her boy friend and has no income of her own.I realize if she married her boy friend she could make a contribution but that is not the case and not on the horizon. My question is: What can I do to set up a trust fund that would serve the same function as the Roth IRA s would have?.