Sunday, February 20, 2011

2010 Roth IRA Contribution Limits

The Roth IRA contribution deadline for 2010 isn’t as fast approaching as you might think. You’re allowed to contribute towards the 2010 limit until you file your taxes or April 15, 2011, whichever comes first.

2010 Roth IRA Contribution Limits

What are the 2010 Roth IRA contribution limits?
Your individual Roth IRA contribution limit varies according to...
  • Your tax filing status
  • Your income level
  • Your age
So let's look at how each of those aspects impacts your annual contribution limit...

2010 Roth IRA Maximum Contribution

Unless you earn too much to qualify, the maximum 2010 Roth IRA contribution limits are...
  • $5,000 if you're under age 50
  • $6,000 if you're over age 50
As a general rule, these are the maximum contribution limits. But keep in mind, there are always exceptions to the rule.
Nevertheless, these aren't the maximum limits for everyone.
Why?
Because your maximum 2010 Roth IRA contribution limit phases out as your income rises above the threshold for making the maximum contribution.

2010 Roth IRA Income Limits

Your ability to make a 2010 Roth IRA contribution as well as the limit of that contribution also depend on your income level as related to your tax filing status.
To find out how much you're eligible to contribute in 2010, look for your tax filing status in the sub-headings below:

Married Filing Jointly

If you're married and filing a joint tax return, you can contribute a maximum of...
  • $6,000 if you're over 50 and your combined earned income is $167,000 or less
  • $5,000 if you're under 50 and your combined earned income is $167,000 or less
  • $0 regardless of age if your combined earned income is more than $176,000
If your earned income is somewhere between $167,001 and $176,000, your 2010 Roth IRA contribution limit phases out.
For instance, if you're 48 years old with a combined income of $171,000, then your contribution limit is 50% of what it would be if you earned $167,000 or less.
Why?
Because $171,000 is the midpoint between $167,000 and $176,000, and the 2010 Roth IRA contribution limit phases out on a percentage basis related to where your income falls within that range.
So if your maximum contribution limit is $5,000 at $167,000 in earned income, it's $2,500 at $171,000 in earned income.
Likewise, if your maximum limit is $6,000 at $167,000, then it's $3,000 at $171,000.
Does that make sense?

Single, Head of Household, or Married Filing Separately (And Didn't Live With Your Spouse)

If you're single, head of household, or married filing separately (and didn't live with your spouse for any part of the year), you can contribute a maximum of...
  • $6,000 if you're over 50 and your earned income is $105,000 or less
  • $5,000 if you're under 50 and your earned income is $105,000 or less
  • $0 regardless of age if your earned income is $120,000 or more
If your earned income is somewhere between $105,001 and $120,000, your 2010 Roth IRA contribution limit phases out.
The phase out provision is the same as for someone who is married and filing a joint tax return. Your contribution limit simply phases out on a percentage basis depending on where you income level falls within the $105,001 to $120,000 range.

Married Filing Separately (And Lived With Your Spouse)

If you're married filing separately, and...
You lived with your spouse for any part the year, you can contribute a maximum of...
  • $6,000 if you're over 50 and your earned income is $0
  • $5,000 if you're under 50 and your earned income is $0
  • $0 regardless of age if your earned income is $10,000 or more
If your earned income is somewhere between $1 and $10,000, your 2010 Roth IRA contribution limit phases out.
The phase out provision is the same for everyone, regardless of tax filing status. Under the phase out rules, your contribution limit phases out on a percentage basis depending on where you income level falls within the $1 to $10,000 range.

Do Roth IRA Income Limits Disappear in 2010?

Unfortunately, no.
2010 Roth IRA contributions are still subject to income limitations, but...
Income limits on Roth IRA conversions do disappear in 2010.
So what does that mean?
It means you can NOT contribute to your Roth IRA in 2010 if your Modified Adjusted Gross Income (MAGI) exceeds the IRS limit for your tax filing status.
So the idea that Roth IRA income limits disappear in 2010 is false.
However...
The income limits on Roth IRA conversions do disappear in 2010, and that means Roth IRA income limits effectively disappear.
Why do they effectively disappear?
Because contributions to your Traditional IRA are NOT subject to income limits. Whether or not your contributions are deductible is subject to a cap, but not the contributions themselves.
So...
If you earn too much to contribute to your Roth IRA, you can make non-tax deductible contributions to your Traditional IRA
How is this possible?
Remember, the income limits on conversions disappear in 2010.
So making a non-deductible contribution to a Traditional IRA and following that with a conversion to a Roth IRA is essentially serves the same purpose as making a Roth IRA contribution.
For example...
Let's say you're single, 40 years old, and earn $250,000 per year.
Due to IRS income restrictions on Roth IRA contributions, you're ineligible to contribute to your Roth IRA.
Why?
Because the income limit for a single person is $120,000. If you earn more than $120,000 per year, you're ineligible to contribute to your Roth IRA.
You're also ineligible to make tax deductible contributions to your Traditional IRA.
However, you CAN make non-tax deductible contributions to your Traditional IRA.
So you do exactly that, making a $5,000 non-deductible Traditional IRA contribution.
Now, since the income limits on Roth IRA conversions disappear in 2010, you're eligible to convert your Traditional IRA to a Roth IRA.
Normally, a conversion triggers a tax liability on the original Traditional IRA contributions (assuming they were tax deductible when made), but since the contributions you made are non-deductible (just like Roth IRA contributions), you don't trigger a tax liability.
Instead, you end up with $5,000 in your Roth IRA...
See how that works? It's easy, right?
Yes, but...
Don't get overly confident. Proceed with caution.
Why?
Because if this is the route you choose, you need to make sure you understand the Roth IRA conversion rules. Otherwise, you might trigger unexpected taxes or penalties. In fact, it's probably a good idea to consult a tax attorney or an accountant before doing this.
Why?
Because the Roth IRA conversion rules are very specific.
For instance, let's say you have two brokerage accounts, one funded with deductible IRA contributions and the other one funded with non-deductible IRA contributions.
If you convert the non-deductible brokerage account to a Roth IRA, the IRS only treats a percentage of your conversion as non-deductible.
Why?
Because the IRS views all of your IRA accounts as a single IRA.
So when you convert the non-deductible brokerage account, the IRS views this as a conversion of a percentage of your Traditional IRA. And that percentage is based on the total value of the assets in all your accounts designated as a Traditional IRA.
So if you have equal amounts of money in both accounts, and only convert the non-deductible account, the IRS treats only 50% of those funds as non-deductible.
See why it's probably a good idea to seek professional advice?
Taking advantage of 2010 Roth IRA conversions is relatively simple for someone who doesn't have existing Traditional IRA accounts, but for someone who does, it can be quite complicated.
So don't be afraid to seek help if you need it.
. After you do that, you simply convert your Traditional IRA to a Roth IRA, andPresto! You just funded your Roth IRA!

Conclusion

The 2010 Roth IRA contribution limits are based on the following factors...
  • Your tax filing status
  • Your income level
  • Your age
To find out how much you can contribute in 2010, compare your earned income to the allowable ranges for your given tax bracket.
Also, despite the Internet rumors, Roth IRA contribution income limits remain in full effect for the 2010 tax year. What does change is the income limit on making a Roth IRA conversion.
Don't make the mistake of confusing the two. While the change in law effectively eliminates the income restrictions on making a Roth IRA contribution, if your income exceeds the Roth IRA limit, you can NOT directly fund your Roth IRA.
Why?
Because you're still ineligible to contribute to your Roth IRA. What you can do is make a Traditional IRA contribution and then convert your Traditional IRA to a Roth IRA.
Make sure you know the difference, or you might get an unwanted knock on the door from the IRS!


If you file for an extension, the Roth IRA deadline for 2010 is still April 15, 2011. The deadline isn’t extended.