Show Me The Money!
December 28, 2009 4:01 PM Subscribe
You are not my CPA but I need advice! I make too much money to contribute to a Roth IRA but I hear the rules are changing. How can I take advantage of this in 2010?
5 years ago (when I was under the income limits) I put 4k into a Roth IRA. It's still open. These days I max out my 401k (have about $150k in there) and do not put anything else into my retirement account nor do I contribute to an after-tax Roth. I now make too much money to contribute to my Roth IRA. I'm 31 years old. I expect to make too much money next year to contribute to my Roth IRA as well.
I hear it may be advantageous for me to open an after tax IRA (in 2009) for the distinct purpose of 'rolling' it over to a Roth IRA next year. Here are my questions:
1) Do I have to open the after-tax IRA before the end of the year or do I have until April 15th?
2) Is this a good idea?
3) Is there anything I can do with my 401k to take advantage of this? Roll my 401k into a Roth IRA next year? How would this work? (I'm prepared to pay the income taxes on the amount rolled).
4) Am I limited to 5k (the yearly limits) or can I do more?
5 years ago (when I was under the income limits) I put 4k into a Roth IRA. It's still open. These days I max out my 401k (have about $150k in there) and do not put anything else into my retirement account nor do I contribute to an after-tax Roth. I now make too much money to contribute to my Roth IRA. I'm 31 years old. I expect to make too much money next year to contribute to my Roth IRA as well.
I hear it may be advantageous for me to open an after tax IRA (in 2009) for the distinct purpose of 'rolling' it over to a Roth IRA next year. Here are my questions:
1) Do I have to open the after-tax IRA before the end of the year or do I have until April 15th?
2) Is this a good idea?
3) Is there anything I can do with my 401k to take advantage of this? Roll my 401k into a Roth IRA next year? How would this work? (I'm prepared to pay the income taxes on the amount rolled).
4) Am I limited to 5k (the yearly limits) or can I do more?
Just to clarify, the changes to the Roth IRA that take effect in 2010 are for CONVERSIONS--converting a traditional IRA to a Roth IRA. Meaning you'd have to open and contribute to a traditional IRA before converting it; you couldn't just open a new Roth.
Also, I have heard that it's only the federal guidelines that are changing, not the state guidelines--so your state might keep the income restrictions. You should talk to a CPA specializing in the tax code of your state to find out for sure what your options are (and because I can no longer find the source of that, but I'm positive I read it on a PF blog in the last month).
Your 401(k) might work to be rolled over, but only if you've left that job (that's what I did with my old 401(k) but my current job's 401(k) was not eligible). You really need to talk to a professional about all this.
Sources: Bankrate, MotleyFool, MotleyFool again.
If you're eligible I think this is a really smart move. I'm not subject to the income limitations, but earlier this month I crunched the numbers and am kicking myself for not converting three years ago when I rolled my old 401(k) into a traditional IRA. You don't want to know how much money I theoretically lost out on, even given the recession. The power of tax-free compound interest is staggering.
posted by peanut_mcgillicuty at 6:56 AM on December 29, 2009
Also, I have heard that it's only the federal guidelines that are changing, not the state guidelines--so your state might keep the income restrictions. You should talk to a CPA specializing in the tax code of your state to find out for sure what your options are (and because I can no longer find the source of that, but I'm positive I read it on a PF blog in the last month).
Your 401(k) might work to be rolled over, but only if you've left that job (that's what I did with my old 401(k) but my current job's 401(k) was not eligible). You really need to talk to a professional about all this.
Sources: Bankrate, MotleyFool, MotleyFool again.
If you're eligible I think this is a really smart move. I'm not subject to the income limitations, but earlier this month I crunched the numbers and am kicking myself for not converting three years ago when I rolled my old 401(k) into a traditional IRA. You don't want to know how much money I theoretically lost out on, even given the recession. The power of tax-free compound interest is staggering.
posted by peanut_mcgillicuty at 6:56 AM on December 29, 2009
Found the Wall Street Journal article that mentions state limits.
posted by peanut_mcgillicuty at 6:51 AM on December 30, 2009
posted by peanut_mcgillicuty at 6:51 AM on December 30, 2009
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Since you have to pay taxes on the money anyway, rolling it into a Roth means you never have to pay taxes on the gains at withdrawal. You have to leave it in the Roth for at least 5 years before withdrawal, but your best plan would be to leave it there indefinitely since the only benefit you get from the Roth are the untaxed future earnings.
The catch is that if you have any other traditional IRAs with tax-deferred contributions, you must consider them all as one big IRA for tax purposes. This means that you can't just convert the after-tax amount. You must divide the basis across the value of all of your IRAs and pay tax on the tax-deferred portion of the amount converted. If you don't have any tax-deferred traditional IRAs, then you are golden. Just convert the 2009 contribution and you won't owe additional taxes.
Your 2009 contribution is limited to $5000 unless you are at least 50 years old in which case you can contribute $6000.
Generally you can't withdraw from your 401(k) without penalty until age 59 1/2 or you leave your job. Check with your plan provider.
posted by JackFlash at 6:09 PM on December 28, 2009