Employee and spouse are not covered by a retirement plan at work. AIG is over $200,000 a year. Both employee and spouse are over age 51. I know they are not covered by income limitations for making a contribution into a traditional IRA. But can they contribute directly into a ROTH IRA or do they need to do a back-door contribution by first contributing to the traditional and then transfer to ROTH?
ROTH Contributions
Answers
I am not an expert on this subject but I believe they are ineligible to contribute to either IRA if their AGI is over $200,000. I don't think that being covered by a retirement plan at work is a factor anymore. For a filing status of Married Filing Jointly the income limit is $191,000. With the maximum contribution being phased out from $5,500 at $181,000 to $0 at $191,000. I believe this limit applies to both forms of IRA. When you convert from a traditional IRA to a Roth the contributions and earnings up to that point become taxable in the year of conversion so I don't think the back door route would be of much benefit if they could contribute.
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Grady / Jim: I will check to see if 2014 rules have changed, but I am certain that thru 2013, if neither spouse was covered by a retirement plan at work, then there were no income limitations on making a taxable deduction to a Traditional IRA. I never researched if that exception also included ROTH or just traditional. Plus, I am pretty confident that if a taxpayer can make a nondeductible traditional contribution, then they can backdoor into the ROTH. That is a tax free transfer if the taxpayer did not have a traditional IRA prior to the 2013 contribution. Assuming those exceptions still exists in 2014, I am interested in finding out if a taxpayer can avoid the backdoor step and go directly into the ROTH.
thanks
Also not an expert, but check the link for further clarification about what's included/excluded in the AGI...http://www.rothira.com/roth-ira-limits
Reference is made to MAGI (Modified Adjusted Gross Income), which is defined as;
Modified Adjusted Gross Income is used to determine IRA eligibility. The calculation starts with adjusted gross income and then adds back in a number of items such as IRA deductions, self-employment
Hope this helps
You learn something new everyday. Thanks for mentioning this approach. It looks like they can make a non-deductible contribution to a traditional IRA up to the applicable limit which looks like it would be $6,500 each. It looks like they would still have to use the backdoor approach to the Roth as there is still the income limit on the Roth contribution in 2014 but not on the conversion. As you mentioned there would be no or a minimal tax effect unless they have existing traditional IRA accounts.
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Grady - are you seeing in the code that ROTH contributions have limits based on income (even if the taxpayers are not covered by a plan at work)? I was expecting that just couldn't find the exact wording in the code? do you have a reference?
Yes, I was looking at IRS Publication 590, but I believe the code section is "§1.408A-3 Contributions to Roth IRAs" They don't mention participation in an employer sponsored plan in relation to a Roth, I have only seen that in relation to a traditional IRA where it reduces the AGI limit for determining deductibility.
Not sure if this link will work in this forum but here it is: http://www.ecfr.gov/cgi-bin/text-idx?SID=b7bf9713198e0e01effd2d04ef70b239&node=26:5.0.1.1.1.0.3.170&rgn=div8
This doesn't have the updated income limits.
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