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Traditional and Roth IRA Contribution Limits

This article was written by in Investing. 149 comments.


You have more time than you might think to contribute to your 2012 traditional and Roth IRAs. Rather than an end-of-year deadline, you have until you file your 2012 taxes to make that contribution. Federal taxes for 2012 will be due on April 15, 2013, so this is the deadline for establishing and contributing to your 2012 IRA. If you file for an extension, however, your IRA deadline will not be extended; don’t miss the April contribution deadline.

If you’re under age 50 and contributing to your 2012 IRA, the maximum you can contribute to your Traditional and Roth IRAs combined is $5,000. Unlike the past several years, that contribution limit is increasing for 2013 IRAs. In the coming year, taxpayers will see a $500 increase in the maximum contributions. Once 2013 begins and you establish your 2013 IRA contributions, the maximum increases to $5,500. Taxpayers over the age of 50 can make an additional contribution of $1,000 for 2013 between both types of IRAs for a total of $6,500.

Year Under Age 50 50 and Older Standard Deadline Open an IRA
2009 $5,000 $6,000 April 15, 2010 E*TRADE ShareBuilder
2010 $5,000 $6,000 April 18, 2011 E*TRADE ShareBuilder
2011 $5,000 $6,000 April 17, 2012 E*TRADE ShareBuilder
2012 $5,000 $6,000 April 15, 2013 E*TRADE ShareBuilder
2013 $5,500 $6,500 April 15, 2014 E*TRADE ShareBuilder

These contribution maximums are further limited by taxable compensation. If you only earned $3,000 in taxable compensation in any year, that is your IRA contribution limit in that year.

Traditional IRA rules

Contributions to a traditional IRA are tax deductible, but depending on your income and employment situation, the amount that can be deducted from your income varies. Any taxpayer not covered by a retirement plan from their employer can deduct their traditional IRA contributions in full. In 2013, for those who are covered by a retirement plan at work, when modified adjusted gross income reaches a certain level, the allowed deduction for traditional IRAs begin to decrease to zero. If you’re in this situation, you can still contribute to a traditional IRA, but you won’t benefit from the tax deduction as much or at all.

Here are the rules for those who are offered a retirement plan by their employers:

  • Single taxpayers or heads of household can deduct the full amount of their contribution if their modified adjusted gross income is up to $59,000. Between that amount and $69,000, taxpayers can take a partial deduction. At $69,000, the deduction is completely phased out.
  • Married taxpayers filing jointly (and qualified widows and widowers) can take the full deduction up to a modified adjusted gross income to to $95,000. The deduction phases out through $115,000.
  • Married individuals filing separately can only take a partial deduction up to $10,000 in income.

If you are not covered by a retirement plan at work, the limits are more favorable.

  • Single taxpayers, heads of households, and qualifying widows and widowers can deduct their full Traditional IRA contribution, regardless of income.
  • Married taxpayers filing jointly can also deduct their full contribution unless their spouse is covered by a retirement plan at work. If that is the case, with a modified adjusted gross income (MAGI) of $178,000, the deduction phases out until the taxpayers reach an income of $188,000.
  • Taxpayers who are married but filing separately can take a partial deduction through a modified adjusted gross income of $10,000, at which point the deduction is completely phased out.

Roth IRA rules

Your income limits your ability to contribute to a Roth IRA up to the maximum. This is different than the traditional IRA, where income affects tax deductions. Here, income limits contributions. You could be penalized by the IRS if you contribute to your Roth IRA beyond your allowable limit.

  • Those filing as single, head of household, or married filing separately, can contribute the full $5,500 (or $6,500 if over age 50) to a Roth IRA as long as the MAGI is under $112,000. The limit begins to phase out until the MAGI reaches $127,000.
  • Married taxpayers filing jointly (and qualified widows and widowers) can contribute the full amount to a Roth IRA while having a MAGI of under $178,000. The maximum decreases to zero as the MAGI approaches $188,000.
  • Taxpayers who are married but filing separately can contribute the full amount with a MAGI of $0, but the contribution maximum phases out to zero as the MAGI approaches $10,000.

Plan for 2013

An IRA is an important piece of a retirement plan, and it should be high on most people’s priority lists, right below investing in a 401(k) up to the employer’s matching maximum.

If you have a good idea of what your income and tax situation will be in 2013, you can determine how much you can and will contribute to your 2013 IRA throughout the year. A convenient way to contribute is through automatic investments, so you can set it by December 31 and forget about it for the entire year. If you plan to invest in the stock market and don’t want to invest in the IRA with your full year’s contribution at once, you can take advantage of dollar-cost averaging to reduce your exposure to swings in the market.

Set up an automatic transfer from your checking account to your IRA custodian of choice. I use Vanguard for my retirement funds, for example. Because there is no cost to transfer, I would create a plan that places my investment each week. With 52 weeks in a year and a $5,500 maximum contribution, that’s about $105.76 a week or $458.33 a month.

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Published or updated November 6, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 149 comments… read them below or add one }

avatar Mr. GoTo

“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.

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avatar Rick

I contribute the maximum to a company 401K plan. How much could I contribute to a Roth IRA if I opened one?

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avatar eric ♦1,549 (Half-Dollar)

$5,000 if you’re less than 50 years old.

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avatar eric ♦1,549 (Half-Dollar)

P.S. Sorry I didn’t see Jeff’s comment below. Yes, make sure your AGI actually qualifies you. If it does, then the maximum annual limit is $5,000. :)

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avatar Jeff Rose

@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.

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avatar Rick

Thanks for your answer. It is good to have blogs like yours to remind us about these things.

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avatar Heidi

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

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avatar Jeff Rose

@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.

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avatar Bill

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????

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avatar jean

Yes, you are correct. I called my financial planner to inquire about converting my IRA to ROTH and she advised, the fine print that no one seems to be talking about is that we will have to pay the taxes now. She ran my numbers and for my household income/age and tax bracket it was best to leave the IRA alone.

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avatar SteveDH

You need to call your planner back!! If you rollover a Traditional IRA to a Roth IRA this year you can spread the taxes bill between 2011 and 2012. You do NOT have to pay ANY additional on this year’s return. You could, if disciplined, save up for the necessary tax bills in 2011 and 2012. (tax form 8606)

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avatar Jeff Rose

@ 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!

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avatar Donna

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

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avatar Jeff Rose

@ Donna

You are almost correct. The catch up contribution will increase by $500 but that does not begin until 2010.

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avatar Michael

My adjusted gross income in 2009 should be about 110,000. How much can I put in my Roth IRA in 2009?

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avatar Jeff Rose

@ 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)

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avatar Michael

I am filing single.

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avatar lola

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

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avatar Jeff Rose

@ 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?

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avatar Excess

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?

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avatar Jerald Kuhn

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

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avatar Jeff Rose

@ 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.

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avatar Pat

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?

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avatar Jeff Rose

@ Pat

Yes, same rule applies.

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avatar Josh

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

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avatar Jeff Rose

@ 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!

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avatar Forrest & Jennifer

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.

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avatar Jeff Rose

@ 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!

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avatar Archer

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!

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avatar Bill

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.

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avatar Ben

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.

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avatar Patrick

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

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avatar Jeff Rose

@ 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.

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avatar ed DaMan

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?

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avatar Mike

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!

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avatar Jeff Rose

@ 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.

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avatar Jeff in CA

@ 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?

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avatar Jeff Rose

@ 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.

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avatar Jeff in CA

You interpreted that as I intended. And that was exactly my question. Thanks for your answer!

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avatar Julie

I am 55, self-employed and so is my husband.
So is $49K the maximum I can contribute to my Roth IRA? I don’t have a SEP IRA. Between us we don’t make much these days — less than $40K. I received a little inheritance, tho and would like to contribute to retirement.

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avatar Bob

The maximum you and your spouse can contribute to a Roth would $6000. $49k is for other retirement plans.

avatar Jim

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.

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avatar Archer

Jeff and Bill –

thank you so much for the info – I appreciate it!

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avatar George

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

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avatar Luke Landes ♦127,371 (Platinum)

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.

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avatar Jeremy

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.

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avatar Lamar

I understand you need earned income to invest in a Roth IRA. Does severance pay and unemployment benefits consider as earned income?

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avatar Jeff Rose

@ Lamar. Severance pay is. Unemployment is not.

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avatar Alan

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

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avatar Excess in Roth IRA

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.

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avatar yanny

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

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avatar zhenka

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?

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avatar Dan W

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?

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avatar Dan V

Dan W, I am in the same situation as you. Did you ever get an answer to the question?

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avatar Jeff Rose

@ Dan W and Dan V.

You can contribute to both a SEP and Traditional IRA. The total deduction you are allowed for both is up to $49,000 which is the cap on annual additions to defined contribution plans for 2009. In the event you were able to contribute more, the tradtional IRA would have to be a non-deducitble IRA.

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avatar tom

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?

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avatar Britt

@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.

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avatar Sandra

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!

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avatar Britt

@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.

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avatar christy

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

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avatar Jeff Rose

@ 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 ;-)

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avatar Bob Howard

Are IRA distributions taxable this year–2009? I heard a rumor they arent because of the state of the economy.
Bob Howard

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avatar Marcus

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

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avatar SL

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

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avatar navin

the best solution would be to re characterize your $1000 Roth IRA contribution to 2009 contribution.

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avatar Scott

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?

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avatar SKN

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!

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avatar Jeff Rose

@ 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.

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avatar Glen

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?.

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avatar Melanie

Can I participate in both my company sponsored traditional 401(k) (max amount: $16,500) and contribute to my traditional IRA in 2009? Any income limitations or restrictions? I have heard varying opinions on this. Thanks!

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avatar Jeff Rose

@ Melanie. You can most definitely contribute to both. The only thing that MAY happen is that you might not give the full tax deduction for your traditional IRA contribution (It then becomes a non-deductible IRA). It all depends on your AGI (for you and spouse) and whether you have a retirement plan available to you both (you do, of course, but if you have a spouse then that factors in, too). Check out my post on how to qualify for a tax deduction on your traditional IRA contribution http://www.goodfinancialcents.com/2009-traditional-ira-deductibility-contribution-limits/ Good luck!

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avatar j

wow there is a lot of bad information at the beginning of these comments..

if this has not been explained already..

There are two variables to the deductibility of a Traditional IRA, MAGI And participation in a QRP (Qualified Retirement Plan). If Both spouses do not participate in a QRP, there are NO MAGI limitations to the deductibility of a TIRA contribution…

Also there were no inflation increases on IRA limits for 2010..

If anyone needs real help on this stuff you can email me. I am a CPA and I specialize in pension law…

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avatar Michael

What is your email address? I would love to send you a quick question about TIRA decutions. Thanks! speedy0307 AT gmail.com

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avatar Steve

I’m not too smart on this stuff but I’ll ask anyway. I am 55. Can I put $10,000 into my traditional IRA per year and only take the $6K deduction?

Thanks, hope thats not a stupid question!

Steve

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avatar Sharon Hansen

That is not a stupid question Steve. I have long wondered that myself. I don’t know the answer and if you have since found out, please post.

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avatar DG

Jeff,

Can I contribute to a SEP IRA (I am self employed) and then convert it to a Roth right away??? For tax purposes, I will get a wright off on my 2010 taxes and pay the tax on the money in 2011 and 2012, am I missing something??? Mainly want to know if I can do a contribution and a conversion in the same year?? Thanks in advance

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avatar Jeff Rose

@ DG

Yes, you can do it and as of now will be able to do it each year going forward. A few things to consider:

1. What happens if you earn more in those years? Then you may pay more tax then.
2. If you are under 59 1/2, you better pay the tax on the conversion with money outside the IRA otherwise you’ll be subject to the 10% early withdrawal penalty.
3. If you have other IRA’s in the mix, those will be included in the conversion total. See this article: http://www.goodfinancialcents.com/2010-traditional-ira-to-roth-ira-conversion-tax-rules/

So you’re not missing anything, but for the most part it should cancel out the immediate tax benefit but if time is on your side the large chunk in the Roth IRA will be sweet at retirement.

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avatar Scott

Jeff,

My income is normally high enough that I am unable to make a Roth IRA contribution. I understand that starting in 2010 we can get around the Roth IRA income limitation by first contributing to a non-deductible Traditional IRA and then converting those contributions to a Roth IRA. So for 2010, I’m planning on making two $5K non-deductible IRA contributions, one for 2009 (before April 15, 2010) and one for 2010, then convert those contributions to a Roth IRA in early 2010. So far so good.

The twist in my situation is that I inherited a Traditional IRA from my domestic partner, who passed away in 2005. Because we weren’t allowed to marry, I’m considered a non-spousal beneficiary, and I’m not allowed to roll the Inherited IRA into my own Traditional IRA. Instead, I was planning on following the 5-year rule for distributions of inherited IRAs, i.e. wait until the end of 2010 and withdraw the entire amount in a taxable distribution.

My question is, when I convert the non-deductible Traditional IRA to a Roth IRA, will the IRS consider the Inherited IRA to be part of my Traditional IRA, and thus require pro rata tax on the combined amount? Does it depend on the relative timing of the Traditional-to-Roth conversion, versus the distribution of the Inherited IRA? In other words, would it be better for me to distribute the Inherited IRA first, before converting the Traditional IRA to Roth IRA, or should I stick to my original plan? Or does the IRS consider the Inherited IRA to be different from the Traditional IRA, so the order doesn’t matter?

Thanks in advance for your thoughts on this siutation,
Scott

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avatar Andy

Conversion rule is a great one to take advantage of this year. With taxes in the long term going only one way (up!) converting now can make a lot of sense for those with higher incomes.

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avatar Mark

I’m concluding a 23 year military career and considering my options regarding consolidation of retirement accounts. In addition to my Roth IRA, I have a TSP account, which I understand is treated the same as a 401(k) by the IRS. I have $30K in the TSP account, and $8K is tax free as it was contributed while I was serving in a combat zone. My question is whether it is advisable to roll the entire account into my Roth IRA, and assume I would only have to pay taxes on the remaining $22K?

Thanks – Mark

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avatar EJ

I can still make contributions to my Roth IRA after five years, yeah? Is there a lifetime limit of how much you can put in, or is it just the yearly maximum?

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avatar Jim

Jeff, I contributed $4,000 to a traditional IRA in 2009 and just realized that I am eligible to make a $5,520 contribution to a Roth IRA for 2009. I want to get $3,520 of the $4,000 out of the traditional IRA and into the Roth and contribute another $2,000 to the Roth before April 15. I turned 50 in 2009 so I am eligible for a $6,000 total IRA contribution. What do I have to do to get the money out of the traditional and into the Roth? Should I attach a note to my 2009 return about this activity?

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avatar Adam

Hello. I contributed $5000 for both my wife and I earlier in 2009 to a Traditional IRA through Fidelity. When filing my taxes with turbotax, I get the following message: Adam’s modified adjusted gross income (MAGI) is $169,313, which puts Adam over the limit for IRA deductions. To deduct a contribution, you can’t have a MAGI of more than $109,000 while being covered by a retirement plan at work.

I guess I am fine if I can’t deduct this, but what are my options. I don’t want to take the money out in 20 years and have to pay more taxes. Please help!

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avatar Jeff P

In 20 years, you will not be taxed on the $5,000 of IRA contribution–because you did not deduct this contribution on a pre-tax basis. In 20 years, you will only pay taxes on the earnings that were generated on the original $5,000.

Nevertheless, this is not an optimal situation.

You have two options to optimize your situation:

1. Reverse your 2009 IRA contribution and pay the 10% early withdrawl penalty plus tax on the earnings.

or

2. Convert your $5,000 of non-deductible IRA to a Roth IRA in 2010. Then, you will only pay tax on the earnings generated since you originally contributed the $5,000. Then, in 20 years, all of your withdrawls from the Roth IRA will be tax-free.

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avatar Julie

My husband and I each contributed the maximum of $5,000 into our Roth IRAs for tax year 2009, however, our MAGI is going to be around $176,000 for 2009. This means we can’t contribute to our Roths in 2009. I also expect we’ll be above the income limit in 2010 as well. Can we take advantage of the 2010 Roth IRA conversion loophole (no income limits on conversions in 2010 only) by converting our excess 2009 contributions to an after-tax Tradition IRA, then continue to contribute the maximum for 2010 as after-tax Tradition IRA contributions, and finally reconverting back to the Roth IRA before the end of tax year 2010?

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avatar Jeff P

I have exactly the same question

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avatar Jeff P

My self-employment income each year from consulting work is approx. $1,000. However, as a real estate investor, I net approximately $100,000 from real estate rental activity that is reported on Schedule E. Can I count any of my Schedule E income as “qualifying income” for the purposes of contributing to a Roth IRA? Or am I limited to the net income (after expenses) reported on my Sch. C for my consulting activity?

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avatar Bob M

I have a 401k to which I contribue the max with makeup (60yo, $22,000) and company contributes $6600. I also have self employment income of about $150,000 and have established a SEP plan. Am I limited to contributing $49,000 less the $28,600 (401(k) or $20,400 to my SEP or can I contribute the maximum allowed to my SEP notwithstanding the 401(k) contributions?

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avatar zia shanner

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 Traditional IRA contributions? Can we contribute $5k each to a Traditonal IRA?

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avatar SSers

I’m so glad I found this post! Please help me (I am single taxpayer, under 40yrs, $57k annual income):

I contributed $3500 to my employer’s Roth 401(k) in 2009, about $1000 into my employer’s regular 401(k), and $1000 into my ETrade RothIRA in 2009. I left my job in 2010, and had to roll over my employer’s 401k & Roth401k into my ETrade regularIRA & RothIRA, respectively.

Since I made $1000 in contributions for the 2009 year into the RothIRA, and am now rolling over $4200 (includes market growth on my $3500 from above), so it looks like I deposited over $5000 into my Roth IRA.
My question is, am I allowed to contribute $4000 for the 2009 taxable year, since I only technically contributed $1000, and the additional increase in my account is from a direct rollover? Also, can I still contribute $5000 for 2010?

Is there a penalty by the IRS for contributing over $5000 per year? (Although I really didn’t, because $1000 was into the RothIRA, $3500 into Roth401k, and $1000 into regular 401k)

Thanks so much! My situation is unique because my direct roll-over was cash, not securities. Because my employer wouldn’t rollover securities to ETrade since they were proprietary funds.

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avatar ROBERTA

Make maximum contribution to ira, then retired early. Did not make enough to justify maximum contirbution,. can i take some out by april 15th

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avatar Damica

I have Roth accounts at both Vanguard and Fidelity. I use VG only to buy mutual funds and FD to only buy stocks because VG charges fees to buy stocks while FD doesn’t.

Because it takes time for money to transfer to these accounts and because I’m not sure what I want to buy yet, I’d like keep money ready in both accounts to buy right when I want to (instead of waiting for money to transfer between accounts). My question is, to accomplish this goal can I technically do the following:

I’ll contribute $5000 to each firm ($5k to VG and $5k to FD = $10,000 total for 2010). I would put that money in cash reserves. Throughout the year I’ll buy what I want, up to a max of $5000 total. By my tax filing deadline I’ll remove the remaining $5000 out of the cash accounts and pay no excess penalty.

I am just concerned that this will get me in trouble because it will look like I contributed $10,000 per year, which is obviously too much for anyone.

Secondly, when I remove the money from the cash accounts, do I need to fill out any paperwork with the IRS? I know I need to fill stuff out with VG and FD.

Thanks for any input.

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avatar Jake

*We contributed to tranditional IRA in early 2010 for 2010, $12k max, both over 50

*Since then, we have contribute 100% of income to a company 401k plan $22k, does that
effect our earned income for the IRA?
Are we now still eligible to have contributed to a Traditional IRA?
(Earned income to small now or is it not effected by 401k contributions?)

*If so, how do I reverse those Traditional IRA’s?

Do we just not claim them on tax return and cash them out, paying penalty in 2010?

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avatar Pat Devereaux

Can I contribute to a Roth IRA if I am retired. I collect a monthly Pension check. I am not working. I am 55 years old.

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avatar Bill Schinbine

I am 65 years old retired and receive 60K a year form retail property How much can i contribute to my standard 401 account that will be deductable on my income taxes for 2010

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avatar Joanne

I am 68 and was unemployed in 2010. I am collecting social security and two pensions. I don’t call myself retired because I am looking for a part-time job. Can I still contribute to my Roth, Traditional IRA, and 401(k) for 2010?

Joanne

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avatar Vickisbestrothira

I’m looking for the best roth IRA and didn’t know much about comparing plans, so this was helpful.

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avatar Christina

I was eligible for a Roth IRA when I was single, but I got married in May. We now make too much to contribute to a Roth IRA, but I forgot about the income limits and continued to contribute up until now. What should I do? Thank you.

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avatar asia

On our taxes we file married filiing jointly. I make under $176,000 and my wife has no income. We also live outside the USA and I work outside the USA and make under the $91,400 tax exemption. Can we both have Roth IRAs and contribute $5,000 to each for 2010?

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avatar Mark

I’m concluding a 23 year military career and considering my options regarding consolidation of retirement accounts. In addition to my Roth IRA, I have a TSP account, which I understand is treated the same as a 401(k) by the IRS. I have $30K in the TSP account, and $8K is tax free as it was contributed while I was serving in a combat zone. My question is whether it is advisable to roll the entire account into my Roth IRA, and assume I would only have to pay taxes on the remaining $22K?

Thanks – Mark

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avatar Ryan

I have already contributed $10,000 to my roth this year. I would like to convert my Trad. Ira to my roth. Do I have to wait until 2011?

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avatar Greg

The article is titled “Traditional and Roth IRA Contribution Limits for 2011″, yet mentions nothing about Traditional IRA contribution limits…I just noticed that there is a link to myfederaltax.com, but that’s not really sufficient to warrant mention in the title of the article…

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avatar Luke Landes ♦127,371 (Platinum)

The contribution limits for Traditional and Roth IRAs are in the first paragraph in the article. ($5,000 combined if under 50 years old, $6,000 combined for everyone else.)

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avatar Greg

You can delete/ignore my comment. I was confusing it with 401k limits, which is what I was interested in… Sorry for my snarkiness. I read and enjoy your blog all the time!

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avatar Luke Landes ♦127,371 (Platinum)

No worries! I’ll put together an article on 401(k) rules for 2011 shortly.

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avatar Darwin's Money

I was curious reading this article. What happens if hypothetically, one contributes to a Roth IRA during the year, then their income breaches the limit by year’s end? Does the IRS really know? Do they cross check this? Wondering what would happen if said taxpayer either wanted to self-correct somehow or just ignore altogether and wing it with the IRS. I don’t make that kind of money so I don’t have that problem LOL. But curious for future reference.

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avatar Tom Dziubek

Darwin, you kind find out more about via the IRS’ Pub 590. http://www.irs.gov/publications/p590/ch01.html#en_US_publink1000230422

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avatar Luke Landes ♦127,371 (Platinum)

The IRS knows because brokerages (should) submit a tax form (5498) to the IRS outlining your contributions for the year. It might take them a while for them to figure it out… but I wouldn’t chance it. It’s not difficult for the IRS to match your 1040 with the 5498 submitted by your IRA issuer.

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avatar Money Reasons

Say, don’t we have into next year to contribute to our 2010 roth iras? I believe it’s April 15, 2011 is the last day to contribute for a 2010 roth ira.

I’ve been holding off, but I like to get it done in December, even though we have a bit of a window still for the Roth.

Too bad they didn’t continue to up the Roth IRA limit (as you can tell I’m a Roth fan) :)

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avatar Tom Dziubek

You are correct. You can make contributions up until the due date of your return.

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avatar Jenna

I definitely need to add a little bit more to my Roth IRA. Thanks for the reminder.

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avatar eric ♦1,549 (Half-Dollar)

Holy moly…..it took me awhile to realize this post was updated from last year. I was starting to wonder where all of these comments came from…..

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avatar David Raskin

My wife wants to convert her IRA of $2000 in 2011 to a ROTH. Will this effect her limit on what she can contribute to her ROTH in 2011 assuming she qualifies for the maximum contribution amount?

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avatar Angie

I don’t have a 401k plan through my current employer. In 2010, I contributed $5,000 to a Roth IRA and $6,000 to a previous 401K that is now a rollover. I am 32 years old, and in doing my taxes, I just realized that this may be a problem. Do I have a course of action, or do I face some type of penalty?

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avatar RC

Flexo-

I think you have a typo/error in the 1st paragraph when you say ” If you file for an extension, your IRA deadline will be extended as well.” I believe per IRS pub 590, it needs to be contributed by the due date of the return not including the extension, which is April 18th this year as you mention.

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avatar Luke Landes ♦127,371 (Platinum)

Thanks, RC, I’ll correct the article.

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avatar Parag Shah

One very nice aspect of traditional IRA’s is that you can contribute for the previous tax year up until the tax filing deadline of the present year (i.e. you can contribute and get a tax deduction for 2009 up until the April, 2010 tax deadline for 2009′s taxes). You cannot do this with a Roth IRA.

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avatar Luke Landes ♦127,371 (Platinum)

You can contribute to a Roth IRA up until the tax filing deadline (for example, April 2011 for 2010′s Roth IRA).

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avatar Bob Palone

Hello;
I rolled over my 401K from my previous employer to an IRA. Can I still make the $6K max contribuition to this IRA this year 2010 or does rolling over the 401K max that option out for 2010?

Thanks

Bob…

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avatar the cyclist

I have a Roth 401(k) at work, to which I have contributed the maximum ($16,500). Can I still contribute to a Roth IRA, assuming I am not over the modified AGI limit?

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avatar Luke Landes ♦127,371 (Platinum)

Contributing to a Roth 401(k) doesn’t preclude you from contributing to a Roth IRA, so as long as you’re within the income limitation and you haven’t contributed to a Traditional IRA, you can contribute to a Roth IRA up to the max.

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avatar Dave Paschall

Adjusted gross income is $103,000, married filing jointly. Want to know if we can contribute to a Roth IRA and deduct it on our 2010 taxes? What is the percent we can deduct from our income if we contribute $6000?

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avatar Kim

I have question. My co-worker is a know it all, and she said something that didn’t quite fit with me. We work in a VERY small office and are not eligible for the Employer Sponsored plan just yet. Because of this, we both have ROTH IRA’s. If we don’t have an ERP and we’re not eligible for one, are our ROTH contributions deductible, or a portion of them? I have always been under the impression that no contribution to a ROTH is ever deductible whether you have an ERP or not. Can someone help? Before I go saying “I told you so”, I’d like this backed up. I have researched it, and so far I’m still right. Just making sure though. Thanks.

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avatar Michael

My wife and I both contributed to employer sponsored 401Ks for the first four months of 2010. We both then swithched jobs and have not contributed to 401Ks since. Our joint incomes are pretty high. If we file sepearately (my income is about 30% higher than my wife), can we get any kind of partial deduction for contributing to a traditional IRA?

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avatar Brian

Michael… same situation! Did you ever find an answer? I want to contribute the 401(k) funds to an existing (or new, if necessary) IRA so I can deduct it from my massive tax owed. Please let me know!!

Thanks,
-Brian

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avatar Jim G

for 2010 i contributed 6000 to my roth ira and 2000 to a traditional ira. I just found out I can’t do this?
does anyone know my options. I already filed my 2010 tax return

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avatar Jerri

I have a quick question. My husband and I are both retired. He receives gifted money from his father twice a year. He would like to deposit this into his traditional IRA, but we’re not sure if he is eligible. He also receives stock options payments for the business he used to own. We are both 60 years old. Any info would be greatly appreciated. Thanks.

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avatar Chris

Jerri, His eligibility would be determined by how much income you report as a couple and whether or not your husband is an “active” participant in a plan, which it sounds like he is. Would suggest reading the IRS publication to isolate your specific circumstances.

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avatar Patrick

Hi. i recently started a ROTH IRA through Share Builder. I am new to the who IRA stuff. when exactly will i pay tax? any help would be greatly appreciated.

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avatar the cyclist

Since it is a Roth IRA, you are presumably paying after-tax dollars into it. So, you’ve already paid the tax. Any future growth/earnings are not taxed.

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avatar Tom Dziubek

Likewise, whereas the tax break from a conventional IRA would the ability to deduct your contribution from that year’s income on your income taxes, the tax break from a ROTH is that the money would be able to be withdrawn tax-free once it qualifies.

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avatar Patrick

So do i need to do anything with next years tax filings in regards to my ROTH IRA?

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avatar jg

my only income this year is from traditional IRA distribution, which i understand is taxable income. i now have some unexpected cash (flow) but no income, can i contribute to my ira and have that deduction (in effect to offset the distribution which is taxable income)?

thank you.

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avatar Chris

@jg, if you’re over 70 1/2 you can’t contribute to an IRA. not sure why you would want to take a distribution and then contribute it again unless you’re forced to…. thus the 70 1/2 rule.

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avatar gregg

As the owner of a holding company, the holding company pays my SEP contribution every year. The holding company owns a leasing business with 3 employees. If I continue to receive SEP contribution from the holding company is there an requirement that the employees also get a SEP contribution from either the holding company or lease company? These employees have each been employed with the leasing company for over 5 years.

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avatar hedi

I wonder if you might be able to answer a quick tax question? Being a
novice investor in the US, I overcontributed to a traditional IRA – I
already had $5k of Roth and didn’t know that there was a combined
limit of $5k for both types of fund. My understanding is that I can
request a disbursement now without penalty since I haven’t filed taxes
for 2011 yet (so long as I request the disbursement as due to an
over-contribution). Does this sound about right to you? I certainly
haven’t made any money on the contribution so far this year…

Thanks,

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avatar Loretta

I put the full amount of my inherited IRA into AAPL stock ($27k). I was going to sell the stock and take the profit made this year as a distribution ($18k). Will it not be taxed as long term capital gains? I read that in a Traditional IRA the withdrawal is taxed as ordinary income (see below). It this true for inherited IRA also?
” 
There’s a trade-off for the benefits of a traditional IRA. When you withdraw money from your account, you have to pay tax on that money. Even worse, you have to treat those withdrawals as ordinary income, even if some of the profits actually came in capital gains or dividends — items that would typically qualify for a lower tax rate outside a retirement account.
Because of that drawback, it’s important to put the right stocks inside a traditional IRA. Apple (AAPL), for instance, has been a great growth stock that has turned many investors into millionaires over the years. But in an IRA, what would have been capital gains taxed at 15% will turn into ordinary income that will carry taxes of as much as 35%.”

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avatar Jim

Can a sole proprietor contribute 100% of profits (and the only earned income for that year) from consulting done during the 2011 tax year to an individual 401(k) and also contribute to a Roth or Traditional IRA where the combination of the contributions to the IRA and 401(k) exceed the person’s total earned income for the tax year?

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avatar Kate

I think I made a mistake to the 2011 contribution. I put $5k into a tranditional IRA, and another $5k into a roth IRA. what will happen? any advice may help. Thanks

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avatar Jim

Kate,

Tha IRS realizes that the complexity of the tax code will sometimes cause things like this to happen. Contact one or both of the institutions where the IRAs are held and tell them that you need to remove excess contributions. I’m sure they will be able to help you. However, I would do this before the tax deadline to avoid possible IRS penalties.

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avatar Angelica

Question, I am 45 years old and I am going to take out my IRA Distribution
I believe the total as of now is $24,000, what is the penalty ? and do I have to report
on my taxes for next year ? do I pay more tax again or just the penalty ?

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