Roth IRA - Income Eligibility Limits

[Guest B Smith]

I'm a first time participant...my apologies if my question is a repeat. My wife and I have a combined AGI very close to $150,000 and I expect it to surpass that level, and the $160,000 maximum, within the next year or two. My question is this: on what income level are taxability of future withdrawals determined - AGI at time of investment, or at time of withdrawal? And what if I invest in a Roth while my AGI is below $160,000, and continue to add to the fund each year even after I surpass the $160,000 threshhold? Will I have to keep track of which investments were made pre-$160,000 and which were post-$160,000 and treat only part of the total withdrawals as tax-free?

[John G]

Income qualification is strictly an issue of can you contribute. There are no taxes under current rules for a Roth distribution in retirement after 5 years. The income qualifications were set two years ago and may change, but they will not make a difference on distributions. If Congress keeps its word, Roth distributions are tax free forever. More than likely, any changes would grandfather existing Roth account holders.

[Guest B Smith]

John G - thanks for your response. Is the threat of an IRS audit the only obstacle to contributing to a Roth and not paying taxes on distributions even though AGI is in excess of $160,000? In no way do I intend to do this, I'm just trying to clearly understand the process of investing in a Roth and determining when to stop contributing due to the AGI maximum being surpassed. Do I make the decision only after completing my tax return each spring, therein calculating the previous year's AGI?

[John G]

One of the problems with these strange regulations is that it is hard to know in advance if you qualify. I would have never put any income constraints on Roths since they are mostly a nuiscance and affect a very small percent of all households. But that is another story....

You can contribute each year assuming that you qualify. Then if you don't qualify you can give your custodian a letter before you file in the following year to correct the problem.

Note, you may have some options in shifting income (like year end bonuses moved to January), reducing first page items (like offsetting some capital gains), or if you own a business by using Section 179 ($20k in 2000) to reduce income. Deductions however are page 2 items and do not affect AGI for calculating Roth eligibility.