[dlochart]

If you have a Roth IRA and have been contributing to it for a few years and then one year you get _lots_ of overtime and your wife starts to work and combined you make more than the maximum, are you then not allowed to contribute to it? Or is it that you cannot start a Roth if you exceed the maximum allowed salary.

I find this odd that you can own something but cannot contribute to it.

Thanks!

[morgaine300]

The contribution limit is for any given year, and the limits can change from year to year. And personally, I'd rather be making those limits than contributing to it. The advantage is it's tax-free earnings. If I made those limits, I could more than afford to pay the tax on the earnings and still come out ahead.

I also don't find it odd that you can't contribute to something you own. I'm sure you own lots of things that are giving you no tax advantages. You only get tax advantages under certain circumstances. There's no advantage of simply owning a house -- what if it's paid off, or you can't itemize? Maybe you can itemize one year (thereby taking the interest) and not another year (and can't take the interest). It's all based on circumstances. That IRA isn't any exception - it's still based on circumstances.

[ebaines]

One option you have is to (a) contribute to a traditional IRA, then (b) roll that traditoinal IRA into a Roth IRA. In Congress's infinite wisdom for 2010 they have eliminated the income limit for rolling traditional IRAs into Roths, even though they haven't eliminated the income limit for contributing directly to a Roth. So you can do this two-step process to end up with the same result. I'm sure the company who is the custodian for your existing Roth IRA will be happy to help you with the process.

[morgaine300]

That's what it is. I knew I saw something somewhere about a change for 2010 but couldn't for the life of me find it again, even on my brokerage sites. By rolling it into a Roth, are you meaning recharacterizing a current year or converting a past year? (Can't quite see the unlimit amount for a recharacterization when the traditional would have a limit to begin with.)

[ebaines]

In 2010 you can convert as much of your existing traditional IRA account(s) to Roth as you'd like, regardless of your income level. So you could conceivably convert a traditional IRA worth $1M if you want. It does seems strange that you may not be eligible to contribute directly to a Roth, or if you do you are limited to a $5K contribution, but you can roll an existing IRA of any amount into one - but that's how Congress set the rules, and no one has ever accused Congress of being logical. If you do this, you must pay taxes on the difference between the account value and your after-tax contribiutions - in other words, you pay income tax on the account's appreciation and any pre-tax contributions you may have made. Then you're not allowed to make a withdrawal for at least 5 years. After that, all withdrawals are tax free.

Here's an article from Schwab with more details:
2010 Roth Conversion: Look Before You Leap

[morgaine300]

I guess it didn't make sense to me because I wasn't aware that there was a limit on doing a conversion. (I only just this past year ever looked into doing a prior-year conversion. Unfortunately it was too late into the year to get all the shenanigans done before 12/31. Too bad cause I had LOTS of deductions for 09.)

Actually, it does make a bit of sense. Converting isn't a new contribution. It's converting money already in an IRA into a different IRA, but it's not the same as making a new contribution to it. (Total IRA money doesn't increase.) It doesn't make much sense that it's specifically a Roth that has income limits. Of course, it's taxable income when you convert -- it would have been taxable at the time of distribution anyway, but perhaps they're trying to get extra current tax? Allowing a one-time split over two years makes it more enticing. In some round-about sick way, everything Congress does ends up making sense, even if only to the government.