Currently people with AGI of $100,000 or more are not eligible to convert their traditional IRA to Roth. This income limit will be lifted in 2010, providing you a unique investment opportunity.
If you are a married individual filing jointly with your spouse, you are not eligible to contribute to Roth IRA if your combined income exceeds $176,000. If your income is between $166,000 and $176,000 the amount that you can contribute is proportionately reduced until it reaches $176,000. If the income is below $166,000, you are eligible to contribute the full $5000($6000 if you are 50 or older). This phase-out limits for single individuals are $105,000 and $120,000 for 2009.
Now, investing in Roth is quite advantageous to anyone and if your income is just above these limits, you are losing a golden opportunity. The 2010 Traditional IRA conversion opportunity gives us a useful loophole though. If you do not have a traditional IRA, you can set up a new one and contribute the full amount to it. In 2010, when you are eligible to convert it to Roth, you can convert the traditional account to Roth IRA in 2010 and bingo you have a Roth account. Better still, if you are not claiming a tax deduction for your contribution, you need not pay any conversion tax for the contribution amount.
This is useful if you do not own a traditional IRA now. If you already own one and it has a size-able amount built up in it, this trick may not be so useful. From what I have read, when you convert, you pay conversion tax on the full amount in all the traditional IRAs put together, not just the one you are converting.
To learn more about converting a Traditional IRA to Roth, see my article in suite101.com
Monday, May 4, 2009
Thursday, April 23, 2009
Saver's Credit aka Retirement Savings Contributions Credit
I was browsing the net and came across some useful information for saving tax. It is actually useful if you fall in the low-to-middle income category especially if your filing status is married filing jointly.
There is a tax credit known as Saver's Credit applicable for low and middle income families when they save for their retirement. The tax credit is non-refundable, which means that it is adjusted against the total amount of federal tax that you have to pay. You can get as much as $1000 as tax credit ($2000 for married filing jointly).
Eligibility Requirements For Saver's Credit
The first requirement is that your income should fall in the low-to-middle income category. The Adjusted Gross Income limit for 2009 is $55,500 if your filing status is married filing jointly, $41,625 if the filing status is head of household and $27,750 if you are single, married filing separately, or qualifying widow(er). If your AGI is above these limits, you are not eligible to claim the credit.
You should be 18 years of age
You should not be a full-time student
No one else (for example your parents) should claim an exemption for you in their tax returns.
If you take any distributions from your retirement account during the year in which the tax credit is claimed and also the two year period preceding the same, the amount of credit that can be claimed will be reduced by the distributed amount.
Retirement Contributions that are Eligible
Contributions to a Roth or Traditional IRA accounts
Contributions to a 401 k plan
Other salary reduction contributions like a SIMPLE IRA plan, a 403(b) annuity, a governmental 457 plan etc
Contributions to a section 501(c)(18) plan
Income Limits for 2009
As the income goes up, the tax credit gets reduced. For example a married person filing jointly with an annual AGI of $32000 can claim $2000 if he has contributed $4000 or more to his retirement plan (50% of $4000). The same person can only claim $800 if his AGI is $34000 (20% of $4000).
As you can see, the Saver's Credit is a great incentive for low and middle income families to save for their retirement.
There is a tax credit known as Saver's Credit applicable for low and middle income families when they save for their retirement. The tax credit is non-refundable, which means that it is adjusted against the total amount of federal tax that you have to pay. You can get as much as $1000 as tax credit ($2000 for married filing jointly).
Eligibility Requirements For Saver's Credit
The first requirement is that your income should fall in the low-to-middle income category. The Adjusted Gross Income limit for 2009 is $55,500 if your filing status is married filing jointly, $41,625 if the filing status is head of household and $27,750 if you are single, married filing separately, or qualifying widow(er). If your AGI is above these limits, you are not eligible to claim the credit.
You should be 18 years of age
You should not be a full-time student
No one else (for example your parents) should claim an exemption for you in their tax returns.
If you take any distributions from your retirement account during the year in which the tax credit is claimed and also the two year period preceding the same, the amount of credit that can be claimed will be reduced by the distributed amount.
Retirement Contributions that are Eligible
Contributions to a Roth or Traditional IRA accounts
Contributions to a 401 k plan
Other salary reduction contributions like a SIMPLE IRA plan, a 403(b) annuity, a governmental 457 plan etc
Contributions to a section 501(c)(18) plan
Income Limits for 2009
| Credit Rate | Married filing jointly | Head of household | Other category of filers |
| 50% | Up to $33,000 | Up to $24,750 | Up to $16,500 |
| 20% | $33,001 – $36,000 | $24,751 – $27,000 | $16,501 – $18,000 |
| 10% | $36,001 – $55,500 | $27,001 – $41,625 | $18,001 – $27,750 |
| 0% | $55,501+ | $41,626+ | $27,751+ |
As the income goes up, the tax credit gets reduced. For example a married person filing jointly with an annual AGI of $32000 can claim $2000 if he has contributed $4000 or more to his retirement plan (50% of $4000). The same person can only claim $800 if his AGI is $34000 (20% of $4000).
As you can see, the Saver's Credit is a great incentive for low and middle income families to save for their retirement.
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