building blocks to achieve financial growth 1900 E. Golf Rd., Suite 950, Schaumburg, IL 60173 630.539.9122 P 630.351.7493 F www.johntdavis.com AMERICA UNITED WEALTH PLANNING calculating planning managing 2012 Roth IRA Maximum Contribution What is the 2012 Roth IRA maximum contribution? That's a great question, and you need to know the answer if you intend to make a contribution to your Roth IRA for the 2012 tax year. Even if you don't plan on maxing out your Roth IRA contribution in the upcoming year, it's important to know your limits. Otherwise, you might get slapped with surprise taxes or penalties from the IRS. So what's the maximum 2012 dollar amount you're eligible to contribute to your Roth IRA? Well, of course, you know the answer to that... It depends! If You're Younger Than 50 Years Old For instance, if you don't reach the age of 50 sometime during the 2012 tax year, your 2012 Roth IRA maximum contribution is $5,000. Absent highly unusual circumstances, that's the absolute maximum amount anyone under the age of 50 can contribute to a Roth IRA. However, don't forget that IRS income limits restrict your ability to contribute. You can only make the maximum $5,000 contribution if... You're single and earn at least $5,000, but no more than $110,000 You're married filing jointly and earn at least $5,000, but no more than $173,000 You're married filing separately and earn no more than $0 You re married working and your spouse is not you can still make the $5,000 per person contribution For instance, let's say you're 44 years old, married, and you and your spouse have a combined income of $151,750. Under IRS rules, you can make a 2012 Roth IRA maximum contribution of $5,000. However, six years from now, when you turn 50, you maximum contribution goes up to $6,000 (or whatever the maximum amount is in 2018).
If You're 50 Years Old or Older Generally speaking, you're eligible to make a larger Roth IRA contribution if you're 50 years old or older. Assuming you earn less than the 2012 IRA Contribution limits for making a maximum Roth IRA contribution, you're eligible to make a maximum contribution of $6,000 per year. So what are the income limits? You can make the maximum $6,000 contribution if... You're single and earn at least $6,000, but no more than $110,000 You're married filing jointly and earn at least $6,000, but no more than $173,000 You're married filing separately and earn no more than $0 You re married working and your spouse is not you can still make the $6,000 per person contribution As long as your income doesn't exceed these limits, and you're over the age of 50, you can make a maximum Roth IRA contribution of $6,000. For instance, let's say you turn 50 years old in the middle of the 2012 tax year. You're single and earn $96,500 per year. How much can you contribute in the 2012 tax year? Up to $6,000. Because you're over 50 (as long as you turn 50 during the tax year, you qualify), and your earned income is below the $110,000 threshold for making the maximum contribution. But what's the maximum amount you can contribute in the 2011 tax year? $5,000. Even though your income is below the threshold for making the 2012 Roth IRA maximum contribution, you haven't yet reached the age of 50, so your maximum contribution amount is $5,000.
The 2012 Roth IRA Income Limits Unfortunately, not everyone is eligible to make a 2012 Roth IRA maximum contribution of $5,000 or $6,000. Because the IRS places income limits on your ability to contribute to a Roth IRA. What are the 2012 limits? You're ineligible to contribute a single penny to your Roth IRA if... You're single and earn more than $125,000 You're married filing jointly and earn more than $183,000 You're married filing separately and earn more than $10,000 Unfortunately, if your earned income exceeds the IRS threshold, your 2012 Roth IRA maximum contribution is zero dollars. For example, if you're married and earn a combined income of $165,000, you can contribute to your Roth IRA, but... If you're single and earn $165,000, you can NOT contribute to your Roth IRA. Because a single person making more than $125,000 is ineligible, but a married couple isn't ineligible until they earn $183,000 or more. The 2012 Roth IRA Income Limit Phase Out Rules So what happens if your income lands you somewhere in between the threshold for making the maximum Roth IRA contribution and the threshold for being ineligible? That's a great question. And the answer is... Your Roth IRA maximum contribution phases out. Your Roth IRA maximum contribution limit phases out if... You're single and earn between $110,001 and $125,000 You're married filing jointly and earn between $173,001 and $183,000 You're married filing separately and earn between $1 and $10,000 Exactly where your income falls within the ranges outlined above determines how much you can contribute. If your income is within one of these ranges, read 2012 Roth IRA Phase Out Rules to properly calculate your Roth IRA maximum contribution.
Make a Max Contribution Regardless of Income If you're lucky enough to earn too much to make a 2012 contribution to your Roth IRA, you can still make the maximum contribution if you wish. How? Well, thanks to the January 2010 elimination of the $100,000 income limit on Roth conversions, anyone can convert a Traditional IRA to a Roth IRA regardless of personal income. And anyone can make non-deductible contributions to a Traditional IRA even if they earn too much to qualify for tax deductible contributions. As a result, you can make non-deductible contributions to your Traditional IRA in 2012, then immediately convert it to a Roth IRA. Since the contributions were non-deductible, you don't force any tax liability and you end up with a 2012 Roth IRA maximum contribution even though your income disqualified you from making a direct contribution. This is really simple if you don't currently have a Traditional IRA, but it gets a bit tricky if you've funded a Traditional IRA in the past. If this is the case, please read 2012 Roth IRA Conversion Rules for more information. Qualified Earned Income Of course, all this assumes you have qualified earned income. Remember, before you can make a Roth IRA contribution of even a single penny, you need to have earned income. This essentially means some sort of compensation from goods or services rendered. Once you have earned income, your 2012 Roth IRA maximum contribution can NOT exceed the amount of money you earn in a calendar year. For example, let's say you're a teenager working a part-time job at McDonald's. You earn $4,200 during the course of the year. Most people under the age of 50 who earn less than the maximum contribution limit can contribute a maximum of $5,000 per year to a Roth IRA. But you can only contribute $4,200 to your Roth IRA. Because you can't contribute more than you earn. And since you only earned $4,200, your Roth IRA maximum contribution is $4,200. But what if you earned $7,500 instead... What's your maximum limit then? The same maximum limit as everyone else.
For someone under the age of 50 earning $7,500 per year, the maximum contribution is $5,000 and not a penny more. Conclusion Your 2012 Roth IRA maximum contribution limit is highly dependent on two factors: Your age Your income level Generally speaking, if you're under the age of 50, your maximum contribution limit is $5,000. While if you're over the age of 50, your maximum contribution limit is $6,000. Both of these amounts decline as your income rises past the IRS threshold for making the maximum annual contribution. So make sure you pay careful attention to your income as it relates to your tax filing status.
building blocks to achieve financial growth 1900 E. Golf Rd., Suite 950, Schaumburg, IL 60173 630.539.9122 P 630.351.7493 F www.johntdavis.com AMERICA UNITED WEALTH PLANNING calculating planning managing 2012 Roth IRA Income Limits I do a lot of 401k and IRA rollovers. I am very often asked what are the 2012 Roth IRA income limits? If you plan to make a contribution for the 2012 tax year, you need to know. The answer of course depends on your tax filing status. For 2012, the maximum income limits for making a Roth IRA contribution are... $183,000 for those who are married and filing jointly on their tax returns. $10,000 for those who are married, lived with their spouse at any time during the course of the tax year, and are filing separate tax returns. $125,000 for those who file as either: 1. Single 2. Head of household 3. Married filing separately and did not live with their spouse during any part of the tax year. From 2011 to 2012, the allowable income limits for making a Roth IRA contribution changed for each tax filing status, so it's important to know the updated IRS rules. Below is an expanded breakdown for each tax status: Married Filing Jointly or a Qualifying Widower If this describes your IRS tax filing status, how much can you contribute to your Roth IRA? Under IRS rules, you can contribute a maximum of... $5,000 if you're under 50 and your earned income is $173,000 or less $6,000 if you're over 50 and your earned income is $173,000 or less $0 regardless of age if your earned income is $183,000 or more If your earned income falls somewhere between $173,001 and $183,000, then the amount you're allowed to contribute to your Roth IRA varies between zero and... $5,000 if you're under 50 $6,000 if you're over 50 If this describes you, then it's best to consult with a financial professional in order to calculate the exact dollar amount of your contribution given the Roth IRA income limits.
Single, Head of Household, or Married Filing Separately If this describes your IRS tax filing status, how much can you contribute to your Roth IRA? Under IRS rules, you can contribute a maximum of... $5,000 if you're under 50 and your earned income is $110,000 or less $6,000 if you're over 50 and your earned income is $110,000 or less $0 regardless of age if your earned income is $125,000 or more If your earned income falls somewhere between $110,001 and $125,000, then the amount you're allowed to contribute to your Roth IRA varies between zero and... $5,000 if you're under 50 $6,000 if you're over 50 If this describes you, then it's best to consult with a financial professional in order to calculate the exact dollar amount of your contribution given the Roth IRA income limits. Married Filing Separately If your filing status is married filing separately, and... You lived with your spouse at any time during the year, how much can you contribute to your Roth IRA? Under IRS rules, you can contribute a maximum of... $5,000 if you're under 50 and your earned income is $0 $6,000 if you're over 50 and your earned income is $0 $0 regardless of age if your earned income is $10,000 or more If your earned income falls somewhere between $1 and $10,000, then the amount you're allowed to contribute to your Roth IRA varies between zero and... $5,000 if you're under 50 $6,000 if you're over 50 If this describes you, then it's best to consult with a financial professional in order to calculate the exact dollar amount of your contribution given the Roth IRA income limits.
2012 Income Limits on Conversions While the 2012 Roth IRA income limits bar married couples earning more than $183,000 and single persons earning more than $125,000 from making a direct Roth IRA contribution, a 2010 rule change offers hope. If you currently earn too much to directly contribute to a Roth IRA, you can still fund one in full by taking advantage of this rule change. In January 2010, Congress eliminated the $100,000 adjustable gross income (AGI) limit on Roth conversions - an act which effectively eradicated the IRS income limits for 2010 and the years which follow. Because anyone, regardless of income, can make non-deductible contributions to a Traditional IRA. And since there's no longer an income limit on Roth conversions, they can immediately convert those nondeductible contributions to a Roth IRA. Need an example? Let's say you're 37 years old and single. Most of your peers are able to contribute the maximum $5,000 to a Roth IRA for the 2012 tax year, but you can't. Because you earn $175,000, well in excess of the $125,000 income limit for 2012. Nevertheless, you can still make $5,000 worth of non-deductible contributions to a Traditional IRA. And since the $100,000 income limit on Roth conversions is no longer in force, you can immediately convert your Traditional IRA to a Roth IRA. Since your original contributions were non-deductible and you haven't had a chance to generate earnings yet, the conversion is completely tax-free. So presto! You just contributed $5,000 to your Roth IRA for the 2012 tax year even though you earn more than the 2012 Roth IRA income limits. SPECIAL NOTE: If you have deductible and non-deductible balances in your traditional IRA. I.e. Let s say you put in pre-tax dollars and after tax dollars into your Traditional IRA. Know that the income taxes that you will pay are pro-rated. What this means is that you ll want to have a spreadsheet to track the pre-tax dollar contributions and your after-tax contributions. The contributions that you put in are referred to as your Basis. You ll want to keep track and provide your tax professional with a record of which part of your Basis is composed of after tax dollars and pre-tax dollars. When you pay taxes on the conversion it will have to be prorated and your tax professional will need this information in order to compute the proper taxes. If you cannot provide this information, you may wind up paying double taxes on the after tax dollars that you contributed.