Roth Opportunities

In yesterday’s post and in January 15’s post I discussed how Roth retirement savings can be a valuable option for people who are contributing the maximum allowable amount to their tax-favored retirement plans, or who want to shift more savings from a taxable investment bucket to a tax-favored retirement plan. “Okay,” you say, “sounds right to me. I’m doing it.” Not so fast, Kowalski. Unfortunately, the feds have erected barriers to Roth-ification. Here’s a brief rundown of those barriers.

(Here’s a fun fact to know and tell. Roth retirement accounts are named after the late Senator William V. Roth, Jr. of Delaware, who championed their creation. “Roth IRA” is the first known instance of an individual’s name actually appearing in the Internal Revenue Code. And thus the late Senator Roth has achieved immortality. But as Woody Allen said, I’d rather achieve immortality by not dying.)

Roth opportunities, like detergent, come in three sizes: small, medium and large. And the barriers differ for the three.

Small. You can make your annual Individual Retirement Account contribution to a Roth IRA instead of a traditional pre-tax IRA.
• The maximum contribution is $5,000 (plus cost-of-living increases beginning 2010).
• Plus an additional $1,000 if you will have reached age 50 by the end of the year (plus cost of living adjustment beginning 2010).
• Also may not exceed your earned income (e.g., salary or self-employment income, but not interest or dividends).
• Annual Roth IRA contributions are not allowed if your Adjusted Gross Income for the year (2009) exceeds the following limits. There’s a small range ($10,000 - $15,000) of Adjusted Gross Income above these limits where a Roth IRA contribution is reduced rather than prohibited:
o Married, filing jointly: $166,000
o Single: $105,000
o Married, filing separately: $0

Medium. You can make your elective deferral to your employer’s 401(k) plan or 403(b) plan on a Roth basis instead of a traditional pre-tax basis.
• The maximum contribution is $16,500 (plus cost of living adjustment beginning 2010).
• Plus an additional $5,500 if you will have reached age 50 by the end of the year (plus cost of living adjustment beginning 2010).
• Unlike Roth IRA contributions, with Roth 401(k) contributions there is no cap on your Adjusted Gross Income.
• But there is a potential barrier: This opportunity only applies if your employer’s plan offers it.

Large. You can convert all or part of an existing traditional IRA to a Roth IRA, regardless of its size.
• There is no limit on the amount in the IRA that can be converted.
• You must pay income tax on the amount converted.
• In 2009, this opportunity is restricted to those with Adjusted Gross Income of $100,000 or less (and is not available if you are married, but filing separately).
• “Adjusted Gross Income” is specially defined to exclude income realized from the Roth conversion itself and from required minimum distributions for the year.
• BIG NEWS: The Adjusted Gross Income limitation disappears in 2010, and this opportunity will be available to all with traditional IRAs!