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Navigating the Roth maze
By Gene Walden
From the Minneapolis StarTribune

The Roth IRA is a textbook case of too many lawmakers with too much time on their hands. Instead of giving us a straight-forward retirement account that every American can  use, Congress loaded it down with enough limitations, qualifications and stipulations to keep a team of tax attorneys scratching their heads.

The Roth imposes different contribution limits for different age groups and income levels. You can’t contribute if you make too much—or if you make too little. And it’s not just how much you make, but how you make it.

“It requires some tricky calculations,” says Susan Stiles of Stiles Financial Services in Minnetonka. “There are so many factors that go into who qualifies and for how much that even some of the tax advisors get it wrong. In fact, I’ve even seen mistakes and inconsistencies at the IRS web site. And that certainly adds to the confusion.”

Last week’s column on Roths elicited emails from dozens of readers with comments, questions and requests for further clarification. So this week we’ll take another stab at unraveling the twisted terms and conditions of this tax-favorable but flawed retirement savings tool.

How do you fund a Roth IRA?
You have two options. You can contribute money that you’ve earned or you can convert money from your traditional IRA into a Roth IRA.

How much can you contribute each year?
If you’re under 50 and single, you can contribute up to $4,000. Married filing jointly can contribute a total of $8,000. If you’re over 50, you can contribute up to $5,000 or $10,000 for married couples who file jointly.

There is no limit to the amount you can convert from a traditional IRA to a Roth as long as you are willing to pay the income taxes on the money you withdraw from your IRA to convert to a Roth.

I have taxable income, but not earned income. Can I still contribute to a Roth?
No, but you can convert money from your traditional IRA to a Roth.

Are there earnings limits that affect my ability to contribute to a Roth?
Yes. You can contribute the full amount if you’re single and your income is $95,000 or less. Between $95,000 and $105,000 your contribution level is reduced on a sliding scale, and over $105,000 you can not contribute. For married filing jointly, the limit is $150,000 with a reduction in the limit on a sliding scale to $160,000. No contributions are allowed if you earn over $160,000. “And that is true even if you participate in an employer-sponsored qualified retirement plan,” adds Stiles.

Are conversions from a traditional IRA to a Roth restricted by the same earnings limits?
No, Congress wouldn’t want to make it that easy. The earnings limit for conversions is $100,000—whether you’re single or married filing jointly. And that’s based not on adjusted gross income but on modified adjusted gross income which factors in foreign income, student loan deductions, higher education deductions and other considerations.

I contribute to a 401k plan at work. Can I still contribute to a Roth?
Yes, if you fit within the income limitations.

My wife and I are both 73. Did you say we can convert our traditional IRA funds to a Roth? I’ve been missing a good opportunity if I could have been putting my required minimum distributions into a Roth?
You can convert your traditional IRA funds into a Roth but not the required minimum distributions (RMD). “Converting to a Roth and taking your RMD are two separate transactions,” says Stiles, “and an RMD distribution does not satisfy the earned income requirements.”

As a preemptive measure, you may want to start moving some IRA money into your Roth. But before you do, you may want to consult a tax or financial advisor to see what your optimum conversion amount might be without significantly impacting your taxes and Social Security. 

If I withdraw money from my IRA to convert to a Roth during my retirement years, won’t that increase taxes on my Social Security?
“That definitely can affect your Social Security,” says Stiles. “You have to be very careful about that. You should work with your tax advisor or financial advisor to maximize what you take out with as little impact as possible on your taxes and Social Security.”

I’m presently receiving a pension from my company that is taxed every month. Can I contribute the full amount to my Roth IRA?
No, your pension does not meet the definition of earned income.

I am over 50. Can I contribute $5,000 to a traditional IRA and, in the same year, convert $5,000 from my traditional IRA to my Roth, thus relieving the tax?
Yes, as long as you meet all of the various income requirements. But of course there are exceptions and limitations—and they are different for traditional IRAs than they are for Roths.

“You can always contribute the full amount to your traditional IRA, but it won’t necessarily be deductible unless you meet certain income limits,” says Stiles. “If you (or your spouse) are covered by a retirement plan at work, in order to get the full deduction on your IRA contribution, you must fall within the income limits--$50,000 if you’re single or $70,000 if you’re married filing jointly.”

If neither you nor your spouse is covered by a retirement plan at work, then you can take the full deduction regardless of income (as long as you don’t contribute more than you earn). Simple stuff, huh?

My wife and I file jointly. I have taxable income from dividends and interest and my wife has W2 (earned) income. Can we both contribute to a Roth?
Based on your income, the answer is no. But based on her income, the answer is maybe. As a married couple filing jointly, she can contribute based on her earned income and you may be able to contribute, as well, based on the spouse rule. For instance, if she has earned income of at least $8,000, you can each contribute $4,000 to a Roth.

Can you buy real estate in a Roth and get a mortgage?
You can buy investment real estate in an IRA, but you can’t borrow against it (no mortgage) and you can’t buy property for personal use or sell property to it.

If you’re still confused—and who wouldn’t be—you can call the IRS at 800-829-1040. And if that doesn’t work, call your Congressmen. Offer them these two words of advice from Henry David Thoreau: “Simplify, simplify.”



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