will income restrictions remain in place for 2011?

Submitted by Mike Hunt on Thu, 2010-12-30 18:33

Was just told by a Fidelity rep that he thinks the income restriction will go back in place in 2011. Is this true? I thought it was lifted permanently but that 2010 was the only year you could defer the taxes to 2011 and 2012.



Submitted by Al Fry on Thu, 2010-12-30 19:25

If you are referring to the Roth Conversion income limits, you are correct. The Fidelity Rep should take some Fidelity University classes in 2011.



Submitted by Mike Hunt on Thu, 2010-12-30 20:06

So the option to contribute DIRECTLY to a roth in 2011 will still be limited to the same income restrictions, but the option to CONVERT contributions from a traditional to a ROTH will be available to everyone, correct?



Submitted by Alan Spross on Thu, 2010-12-30 20:19

Correct. Regular Roth contributions are still subject to the income limits. For 2011, a single taxpayer begins to the contribution phased out at 107k and joint filers at 169k. That’s up 2,000 each from 2010.



Submitted by Robert Lovell on Fri, 2010-12-31 22:32

As a single taxpayer, the income restrictions for a 2011 contribution to a Roth IRA come into play for adjusted gross income between 107k and 122k. While I’d like to make a contribution to my Roth IRA, my adjusted gross income for 2011 is difficult to predict and may be anywhere from 90k (allowing a full contribution ) to 150k (allowing no contribution).

What is your advice for somebody that is in this situation that would like to make a full contirbution to their Roth IRA?

Thanks.



Submitted by Alan Spross on Fri, 2010-12-31 22:59

Since the Roth income limit is toward the lower end of your income estimate, chances are good that you would have an excess contribution if you contribute early and would then have to process and report the correction of an excess contribution. This is typically easy to do unless you are in the income phaseout range and then it gets messy because earnings on your contribution correction change you income and create another small excess contribution. In that situation you would usually be better off waiting for a year or until it becomes evident that your contribution will be allowed.

Exception: If you have no TIRA account now, then a simpler approach is just to make a non deductible TIRA contribution and convert it right away. No income limit for conversions. Another less attractive solution if you DO have a TIRA already, is to still make the non deductible contribution and convert, but then your conversion will be mostly taxable.



Submitted by Robert Lovell on Fri, 2010-12-31 23:23

Thanks for your response.

I understand that an excess contribution would have to be reported if I exceeded the income limits and that the calculation could be difficult if my adjusted gross income was between 107k and 122k.

At the beginning of the year, I had a TIRA that was funded with after tax contributions. With the exception of about $1 (interest on the balance in the account), all of the funds in the TIRA were converted to my Roth IRA at the beginning of 2010.

Can I contribute to the TIRA and immediately convert it to the Roth IRA? What would the tax consequences be? How would I calculate the amount, if any, that would be subject to tax?

Thanks.



Submitted by Alan Spross on Fri, 2010-12-31 23:45

Based on the time of day, your contribution to the TIRA could be a 2010 contribution if you did not already make your 2010 contribution, but made in 2011. That being the case, you might also want to make your 2011 contribution at the same time, being careful to be sure that the custodian applies one to each year. If you then immediately convert your TIRA to a Roth IRA, it will be a tax free 2011 conversion. Your contribution limit is affected by whether you already made your 2010 contribution or not. You would report non deductible contributions on Form 8606, the same form on which you report your conversion.

But be careful here, since if you roll an old 401k or similar plan into your TIRA later in 2011, it would dramatically change your earlier conversion from tax free to mostly taxable. Your conversion remains tax free only if no pre tax funds are rolled into a TIRA of yours prior to 12/31/2011.

Note that for tax free conversions, there effectively is NO 5 year holding requirement to avoid penalty because none of the conversion was taxable in the first place and the penalty only applies to the taxable portion. If you had to tap those conversion dollars, you could therefore do so anytime without penalty.



Submitted by Robert Lovell on Sat, 2011-01-01 00:02

I’ve previously made a full after-tax contribution to my TIRA for 2010 and converted it to my Roth IRA. The only amount left in my TIRA is approximately $1 which was accrued interest that for some reason didn’t get converted.

Am I eligible to make an after-tax 2011 contribution to my TIRA tomorrow and then covert it tax-free to my Roth IRA? I understand your warning that if later in the year I coverted a 401k or similar plan to my TIRA that it would significantly change the tax consequences.

Thanks again- really appreciate your assistance.



Submitted by Alan Spross on Sat, 2011-01-01 00:23

Yes, you could make your 2011 non deductible TIRA contribution and then immediately convert it to a Roth IRA and the conversion would be tax free. If you wait and there is a small amount of earnings before you convert, the earnings only would be taxable.



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