Contributions to Traditional and Roth IRA for 2001?

[Guest ff5561]

I make maximum contribution to my employers 401(k) plan. My wife's employer does not offer any retirment plans. Our combined AGI is less than $160,000.

Questions:

1. How much can I contribute for ROTH & Traditional IRA for 2001?

2. How much can my wife contribute for ROTH & Traditional IRA for 2001?

Thanks for your help!!!

[JAMES PATRICK]

If your MAGI is below $150,000 than you can contribute $2000 to either a non-deductible or Roth or in any combination as long as it does not exceed $2000.

Your wife can contribute $2000 to a deductible or Roth, or in any combination as long as it does not exceed $2000.

If you are between $150k-$160k the amounts for deductible or Roths would be lower.

[John G]

You Q and answer were aimed at 2001 limits. As a result of the tax bill signed by Bush in June 2001, the contribution limits will jump up as follows: $3000 in year 2002, $4000 in year 2004 and $5000 in year 2008.

Also new: a "catch up" provision for folks 50+ years old that adds an extra $500 in 2002.

[Guest ff5561]

Hi Jim:

Thanks for responding to my question. Since I don't qualify for a traditional IRA, I plan to contribute to a ROTH. My wife has been contributing to a Traditional IRA account $2000 each for years 1999 & 2000.

Question:

For year 2002 - Can my wife recharacterize $3000 from her existing traditional IRA to a ROTH account? If yes, can she still contribute another $3000 for ROTH in the same year (2002).

I would appreciate your help!!!

[JAMES PATRICK]

Your wife can CONVERT $3000 of Traditional to Roth (provided your joint AGI is not in excess of $100,000) this year. As you are aware the conversion means she will have to pay taxes on that amount, provided it was a deductible IRA.

You said recharacterize $3000 but from your post it appears she made no contribution in 2001 so there is nothing to recharacterize but if there was for 2001 it would be limited to $2000.

Since she did not make a contribution for 2001 she is still eligible to contribute $2000 as a Roth contribution for 2001 (up until 4/15/2002) as well as a $3000 Roth for 2002 (until 4/15/2003).

[Guest ff5561]

Hi Jim:

Thanks for your quick reply. Since my wife hasn't made any IRA contributions for 2001 yet, the only option she has at this point (since it is past 12/31/2001 she can no longer make any conversions from her existing Traditional IRA account for 2001), she can only contribute a deductible $2000 for a Traditional IRA( or a non-deductible $2000 to a ROTH IRA).

After she makes a $2000 contribution to say Traditional IRA account, she will then have a $6000 total for the years 1999 thu' 2001.

My question is:

If our joint AGI is less than 100,000, can she convert $3000 from her Traditional IRA account to a ROTH IRA account (after paying taxes) for the year 2002? If so, can she still make another contribution of $3000 to a Traditional IRA or a ROTH for the same year 2002. I guess she won't be able to make a new contribution AND a CONVERTION in the same year.

Thanks for your clarification....

[JAMES PATRICK]

I am not sure what it is you are trying to do.

First you are right that it is too late to do a conversion for 2001.

She is eligible to contribute $2000 to a Roth or Trad IRA this year for 2001. It makes no sense to me to put it in a TIRA and then convert to a Roth, so for the 2001 contribution put $2000 in a Roth.

She will have $4000 in a TIRA any part of which she can convert to a Roth this year, as well as contribute $3000 for a Roth for 2002.

To summarize, if she has $5000 available to her she can put it all in a Roth on Monday, $2000 for 2001 and $3000 for 2002.

She can also convert from her TIRA to a Roth $1k or $2k or $3k or the entire $4k.

She would only owe taxes on the conversion amount.

[Guest ff5561]

Thanks Jim. You answered my question.

[John G]

"She would only owe taxes on the conversion amount"

The above is only true if all prior IRA contributions for your wife were deductible. Otherwise you pay tax on a fraction of the conversion. You can not cherry pick what you convert, the math is based upon a universal fraction of nondeductable contribution compared to total IRA assets (even if the assets are in different accounts, locations or custodians). See IRS Publ 590 for examples.