too much money Archives - The Free Financial Advisor

First of all, you make how much money?

Congratulations!

If you make so much money you can’t contribute to a Roth IRA, then a certain amount of back slapping and high-fiving are in order.

If you need a refresher on the Roth IRA limits to determine if you can contribute, we’ve got your back:

If You Have Taxable Compensation and Your Filing Status Is…	And Your Modified AGI Is…	Then…
married filing jointly or qualifying widow(er)	Less than $173,000	you can contribute up to the limit.
	at least $173,000 but less than $183,000	the amount you can contribute is reduced.
	$183,000 or more	you cannot contribute to a Roth IRA.
married filing separately and you lived with your spouse at any time during the year	zero (-0-)	you can contribute up to the limit.
	more than zero (-0-) but less than $10,000	the amount you can contribute is reduced.
	$10,000 or more	you cannot contribute to a Roth IRA.
single, head of household, or married filing separately and you did not live with your spouse at any time during the year	less than $110,000	you can contribute up to the limit.
	at least $110,000 but less than $125,000	the amount you can contribute is reduced.
	$125,000 or more	you cannot contribute to a Roth IRA.

Information courtesy of the IRS

A couple things to point out in our table above:

– First, don’t think just because you make a lot of money and your spouse doesn’t that you can just file “married and separate.” The IRS thought you might consider that maneuver, and now caps income at $10,000 for those who consider that loop-hole.

Also, be aware of what “Modified” AGI means. Leave it to the government to complicate an already complex issue.

Here’s how you calculate your “Modified” AGI (also courtesy of the IRS)

Modified AGI. Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return modified as follows.

Subtracting the following.
1. Roth IRA conversions included on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. Conversions are discussed under Can You Move Amounts Into a Roth IRA, later.
2. Roth IRA rollovers from qualified retirement plans included on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.
Add the following deductions and exclusions:
1. Traditional IRA deduction,
2. Student loan interest deduction,
3. Tuition and fees deduction,
4. Domestic production activities deduction,
5. Foreign earned income exclusion,
6. Foreign housing exclusion or deduction,
7. Exclusion of qualified bond interest shown on Form 8815, and
8. Exclusion of employer-provided adoption benefits shown on Form 8839.

Here’s the point: Knowing your Modified AGI is not as simple as just looking at your W2 to figure out if you’ve made too much money.

If you haven’t done your taxes yet, Turbo Tax or HR Block software will help you find this amount automatically.

Let’s assume–after all these funky calculations–that it’s true: you’ve earned too much money.

Here’s some good news: You, Mr. or Ms. High Wage Earner, still can contribute to a Roth IRA.

You just have to do it the right way. Luckily for you, I’m going to show how:

First, open a non-deductible IRA at your favorite brokerage house (Fidelity, E-trade, Schwab, etc.).
Next, fund your non-deductible IRA up to your maximum IRA contribution limit ($5,000 for those under 50; $6,000 for those turning 50 in the tax year of the contribution);
Wait at least 30 days, or a statement cycle so you can show the money was in an IRA – *DO NOT INVEST YOUR MONEY DURING THIS 30 DAY WAITING PERIOD;
Then, call your brokerage firm and perform a Roth IRA Conversion of your IRA money. You’ll owe tax on the gain (probably just a couple cents of interest), but other than that…pretty easy!

You’ll likely have to fill out a special tax form next year (IRS Form 8606) discussing the conversion, but there will be no tax, no penalty, and now you have a Roth IRA.

A couple of rules:

If you have other IRA money (other than the $5,000 you just put in), you cannot just tell the IRS you want to convert the non-taxable kind. You have to convert IRAs pro-rata which mean only a percentage of your money will be tax free. If you have other IRA money (not 401(k) money, IRA money), before embarking on this strategy – discuss this with a knowledgeable tax advisor who knows what they’re taking about.
Unlike a normal Roth IRA contribution, you do not have immediate access to these dollars. You can access them after 5 years – just like any other conversion monies.
Don’t tempt fate and try to do this at the end of a tax year. There are too many chances for last minute screw-ups. Complete this process during the middle part of the year so you have plenty of time to fix problems before the year’s over. The IRS doesn’t like multiple 1099 forms and stuff like that…as an aside, neither does your accountant.

So there…badaboom, badabing. Now even the 1%-ers can have a Roth. Just like Congress intended.