Skip to comments.IRA Income Limits Don't Have to Limit How Much You Save
Posted on 09/22/2010 9:28:26 AM PDT by Kaslin
Dear Carrie: If you max out your 401(k) and make over $176,000, can you contribute the $6,000 limit (I'm over 50) into a Roth or traditional IRA with after-tax funds? -- A Reader
Dear Reader: Contributing as much as you can each year to your tax-advantaged retirement accounts is one of the smartest financial moves you can make at almost any age. But IRS rules can make contributing to your IRA a bit more difficult as your income grows.
That's because there are income limits on IRA contributions, which vary depending on the type of IRA and whether you're filing as a single taxpayer or married filing jointly. Let's take a look at those limits -- as well as some alternatives that can help you continue to maximize your retirement savings with after-tax dollars.
CONTRIBUTING TO A TRADITIONAL IRA
It's great that you're contributing the max to your 401(k). I always recommend that as the first move in saving for retirement. But your participation in an employer-sponsored plan limits your ability to contribute to a traditional IRA and get the benefit of an upfront tax deduction. For single filers, the most you can make in this situation and still contribute fully to a (SET ITAL) deductible (END ITAL) traditional IRA is $56,000. For married filing jointly, it's $89,000. Obviously, at your income level, that's not an option.
Another factor in a case like yours -- and I think this is something many people don't realize -- is that even if your spouse doesn't participate in an employer-sponsored plan but you do, he or she can't make a full contribution to a deductible IRA if your combined income is more than $177,000.
THE DRAWBACKS OF A NONDEDUCTIBLE TRADITIONAL IRA
There is no income limit associated with a (SET ITAL) nondeductible (END ITAL) traditional IRA, so you could contribute the current maximum of $6,000 with after-tax funds, since you're over 50. However, given current tax law -- particularly low long-term capital gain and qualified dividend rates -- a nondeductible contribution to a traditional IRA rarely makes sense. There's no upfront deduction, and earnings are taxed at ordinary income tax rates when withdrawn.(Who knows what the rates will be when you're ready to make withdrawals!)
Of course, your earnings will grow tax-deferred, but to really reap that benefit you'd have to have a longtime horizon. This close to retirement, the tax-deferred growth may not balance out the income taxes you could end up paying later on.
QUALIFYING FOR A ROTH
A Roth IRA, with its tax-free withdrawals at age 59 1/2, can be a perfect complement to a 401(k), but income limitations are also a factor. For single filers, the ability to contribute to a Roth IRA for tax year 2010 phases out between $105,000 and $120,000. For married filing jointly, the range is $167,000 to $177,000. So here again, your current income disqualifies you from contributing.
One way you could still take advantage of the tax-free withdrawals of a Roth IRA is to convert part of a traditional IRA or 401(k) to a Roth. Starting this year, there are no income limits on conversions. You do, however, have to pay ordinary income tax upfront on the funds you convert (to the extent the converted funds consist of pre-tax contributions and/or taxable earnings, either in whole or on a prorated basis).
Ideally, the money should come from sources outside of your retirement funds; otherwise, you'd be depleting your current savings for future tax advantages. Also, income limitations still apply to future contributions. Best to talk to your tax adviser to see if this makes sense for you.
THE TAXABLE ACCOUNT SOLUTION
At your income level, I think your best bet is to put additional savings in a taxable brokerage account. If you use low-tax investment strategies -- such as equity index funds, ETFs or municipal bonds -- and invest for the long term, you can control your tax exposure. You may end up paying capital gains taxes on your earnings when you sell, but chances are those taxes will be lower than the ordinary income taxes you'd pay when withdrawing earnings from a nondeductible IRA.
While you're reviewing your savings strategy, you might also want to do a retirement reality check to see how close you are to your savings goal and whether your asset allocation is still on target for your age and your feelings about risk. At this point in your life, planning ahead can make all the difference because you still have time to refine your course. But all in all, it sounds like you're on the right track. Best of luck!
Until the feds confiscate it. No, I am not stopping nor am I withdrawing, but that fear is still there....
Just sayin’ until it’s determined if they’re going to nationalize IRA/401K accounts, I don’t think I’d be overfunding them. Might as well stash the cash somewhere safe...like under the mattress, :)
When will Obi grant us the “option” of converting our Roth converted IRAs to social security?
One of the advantages of a taxable investment account is that it enables you to take advantage of “paper losses” that may be incurred when you sell shares to re-balance your portfolio. I’m surprised the article didn’t mention this.
I wonder how many people know this.
because they are expecting to confiscate all funds in those accounts
on a side note... while looking for a recent quote, i was astonished to see how many times this subject has been broached since 2008. they are pushing on it... just trying to find the right way in.
A listener called in asking about tax implications of some financial transactions he was considering, and when the host asked him some questions about his recent activity the caller gave the following answer (I paraphrase, of course):
"I was looking for better diversification and saw an opportunity to do this in a way that gave me some tax advantages, so sold all the shares in my S&P 500 index fund and immediately invested that money in a Wilshire 5000 index fund. I was able to report a 'loss' on my S&P 500 redemption because I had bought those shares during the stock market boom of the late 1990s."
The host of the show got all kinds of excited about that one . . .
"You go to the head of the class, my friend! That is one of the smartest moves a caller to this show has ever made. Since the S&P 500 companies make up almost 60% of the Wilshire 5000 index, you still own shares in those companies anyway -- and yet your transactions qualify as a 'paper loss' for tax purposes!"
I think this article missed an important point for some investors. I am in a similar situation - fully funding 401(k, ineligible for Traditional (deductible)IRA and above the income limits for Roth IRA.
My choice has been to begin making an after-tax contribution of $6000 to a non-deductible IRA (no other, non-Roth IRA’s to confuse matters - already converted those), then convert to a Roth IRA. It bypassed the income limits in a perfectly legal way and allows me to grow this money, tax-free.
Anyone see a problem with this?
Who cares? The govt is going to confiscate all of the 401k’s and the IRA’s and give you a 3% annuity.
The link you provided cites an article written by a guy that owns and runs a business that sells coins and bullion (i.e. hard assets). Has it occurred to you that he might be trying to scare you into stopping contributions to your 401(k)/IRA and buying from him instead?
Unlike most people, I've actually read the Request for Information from the Dept. of Labor. They aren't proposing any such thing. They are asking 401(k) administrators what would happen if the DoL were to require administrators to provide an option to 401(k) account holders to convert their balance into an annuity.
That's it. Period. There are some additional related questions, but it comes down to whether 401(k) administrators should be required to do the same thing that some 401(k) administrators already do.
You won't be required to buy an annuity. And even if they don't require 401(k) administrators to offer that option, you can buy a tax-deferred annuity RIGHT NOW with your 401(k) and/or IRA.
Listen to that........I see them wringing their hands and salivating over the people's private monies. And I swear to you...you and I should beware.
Listen to Miller's last words....they want to REGULATE private monies. PERIOD!! BTW, George Miller is a Marxist Lying Liberal Socialist.
exactly why would i buy from a guy sited in a blog whose business isn’t even referenced? forget why... how? how would i find his business?
instead i should put my money into the government run banks and trust them not to steal it? really??
thanks, but i’ll continue buying my gold as i have for years... and transition the rest to safe havens.
you can do whatever you want, i really don’t care. i know where this track ends, and it ain’t pretty.
I didn't say I trusted them. I said that there's currently no proposal on the table to do any such thing.
I've heard about the committee meeting that is discussed in the video. Idiots (academics, especially) testify before committees and say stupid stuff all the time. That doesn't mean there is any legislation being proposed to do such a thing.
And that's the same advice I'll offer to you.
But, please don't go around telling people it's because the government is going to confiscate their 401(k)/IRA.
It might happen in the future. And aliens from Alpha Centauri might land on the White House lawn.
But, there's no evidence that either is going to happen.
here is another link you can say doesn't mean what it means: link
really, a quick google will turn up numerous articles dating back to 2007
unfortunately for you, i will continue informing people about the progressives plans as much as possible. i've been doing it since the late 90s, and those that have listened have fared much better than those that have not.
It's folly not to think they think they ( whew..!!) know better.
Proposal's? Hell....if they can take over banks, auto companies, etc....they can take over your 401K.
Social Security funds never belonged to you, so the government didn't take anything -- unless you count the initial payroll tax deduction.
here is another link you can say doesn't mean what it means:
I've seen this as well. One loony college professor testifying before a Congressional sub-committee does not constitute any change in policy. Let me know when you actually see any legislation proposed, and it doesn't die in committee under the weight of its own absurdity. Even Bernie Sanders wouldn't survive his next re-election after filing a bill proposing this.
unfortunately for you, i will continue informing people about the progressives plans as much as possible.
You can promote your favorite conspiracy theory all you want. Just don't pretend it's credible and backed by any evidence other than hearsay.