Roth already started, now make too much; What to do?

[Guest nichoju80]

When i first started a Roth IRA in June 05 I didn't plan well and realize that I would be making over the income limit when I had my full time job. I feel handcuffed now because I can not contribute to my Roth, nor will I be able to for the rest of my career. Can it be transferred to my wife's name, thus allowing contributions? (although, she will most likely become a non-working entity soon when we start to have children, thus dis-allowing contributions). The money is just sitting there, and I realize that I can take out the contributions w/o penalty. There are almost zero dividends since it has been invested in June 05. Would it be most prudent to simply withdraw all contributions and place the money elsewhere in a vehicle that is more suitable? If so, what happens to the account? Is it simply closed like a money market acct or such would be? Would my shares of stock (VFINX) just be sold on the market to get my money liquid and withdrawable?

[GMK]

Some options to consider:

Have your wife open a Roth now in her name and fill it up while she has earned income. Contributions to her Roth do not need to be from "her money."

You do not have to withdraw the funds from your Roth to change where the funds are invested. If you have Vanguard change the investment from VFINX to something else they have that you like better, it is still your same Roth account. If what you want to invest in is at another company, contact that company to set up a direct transfer from Vanguard to a Roth in the new company. Changing your investment choices within a Roth and direct transfers from a Roth to a Roth are not taxable events (and no penalty on withdrawing earnings if under age 59-1/2).

Earnings in a Roth grow tax free, which is even better than tax deferred.

[Guest nichoju80]

. Changing your investment choices within a Roth and direct transfers from a Roth to a Roth are not taxable events (and no penalty on withdrawing earnings if under age 59-1/2).

Could you clarify that statement 'no penalty on withdrawing earnings if under age 59 1/2'? I thought it was only CONTRIBUTIONS that were not penalizable.

[txdd]

Just because you can't contribute to a Roth doesn't mean it's "just sitting there". What you have can grow for the rest of your life tax free. That's usually a pretty good deal.

Even though stocks have been down lately, VFINX has appreciated over 15% since June/05. That gain would, in most cases, be taxed and penalized if you withdrew it now. You can change your investment at any time with Vanguard or transfer your Roth to another custodian with no tax consequences.

You can't transfer your account to your wife. She can certainly contribute to her own account if eligible. However, if you have too much income jointly then neither of you is eligible.

The income limit for Roth conversions goes away starting in 2010. If you have traditional IRA accounts by then, you can convert to Roth and build up your Roth balance at that time.

[Belgarath]

Just make sure you don't refer to your wife as a "non-working entity" where SHE can hear you!

[masteff]

Time-out... the AGI limit is the same for both individual contributions and spousal contributions when married filing jointly. See page 60 of IRS Publication 590. If he can't do a Roth due to AGI limit, his wife can't either.

Two additional comments:

1) As noted above, the money in your Roth will grow tax free until you spend it in retirement. It's not wasted. It just seems small sitting by itself like that. Review what you have it invested in and possibly reallocate.

2) If you're making over $166K (the married filing joint limit), then you likely either have workplace retirement savings options (401(k), etc) or self-employed retirement options (depending on what type of employment you have). You should be maximizing your tax advantaged savings opportunites there for this year and going forward.

[jevd]

One other option. As stated above, income limits for conversions are eliminated in 2010. You both could make non-deductible Traditional contributions now until 2010 and then convert to Roth. Also you will have the choice to spread the taxes over two years at that time.

[John G]

Clarification:

Masteff is right - if your married you both qualify via your combined income.

It was not clear from your post if you had a partial year (qualified then) but won't qualify in the future...or you don't qualify at all. If the later is true, then you need to contract your custodian and withdraw the ineligible contributions. You may be able to re-establish the account as a regular IRA.

Alternatively, you can start a general program of investing. For the moment, long term capital gains and dividends are taxed at low rates.

Do not assume that the 2010 wide open option will stand. We have a few elections coming up and a new Congress and President will probably make economic/tax changes. There is not logical reason for Roths (and inheritance taxes) to jump back and forth depending upon the calendar year.

[GMK]

Yes, I should have mentioned combined income - mea maxima culpa.

John G - Your comments about 2010 are spot on.

As it stands now, income limits on conversions to Roth IRA's will also disappear, and for a conversion in 2010, one has the choice to pay the taxes in 2010 or average them over 2011 and 2012. Of course, as things stand, ordinary tax rates go back up in 2011, so that might not be a bargain. We inform people about 2010, but advise them that when we get to 2010, it may not look the same as it does now.

[jevd]

Yes, I should have mentioned combined income - mea maxima culpa.

John G - Your comments about 2010 are spot on.

As it stands now, income limits on conversions to Roth IRA's will also disappear, and for a conversion in 2010, one has the choice to pay the taxes in 2010 or average them over 2011 and 2012. Of course, as things stand, ordinary tax rates go back up in 2011, so that might not be a bargain. We inform people about 2010, but advise them that when we get to 2010, it may not look the same as it does now.

I agree with above. Especially maxing out any 401(k) contributions and more so if there is an employer match. Don't leave any $ on the table.

[Guest nichoju80]

Thanks for all the insight, I am already contributing to my employers 401K up to the match and then some; we are actually not yet married and we filed single for tax year 07, so I was able to contribute some to her Roth, but not with 'her money' as stated before.

When we file for tax year 08 we may be above the limit of 166K, may not. I didn't realize the limit was that high, that is a great piece of information. Thanks again.