16
For a savings vehicle that only allows you to make
a contribution of a little more than $
5
,
000
a year,
IRA
s are certainly governed by a lot of Byzantine
rules. There are Roth and traditional
IRA
s, deductible
and nondeductible, each governed by its own pecu-
liar rules regarding contributions, income limits,
and withdrawals.
And don’t even get me started on rollovers, conver-
sions, and recharacterizations. If you were to do a
web search of “
IRS
Publication,” it’s no wonder that
“
IRS
Publication
590
”—the one that lays out the
rules on
IRA
s—jumps to the top of the list of sug-
gested search terms.
But if you play your cards right—or roll over a good
chunk of change from an employer plan—an
IRA
can
be a key component of your retirement portfolio.
Given that fact, plus the many complexities involved
with the
IRA
wrapper, it’s probably no wonder that
so many people have questions about their
IRA
s. Here
are a few:
Can you contribute to both a Roth IRA and a nonde-
ductible IRA in the same year?
Yes, you can, but the total contribution to Roth and
traditional
IRA
s must not exceed the limits—in
2013
,
that’s $
5
,
500
for people under age
50
and $
6
,
500
for
people over
50
.
Splitting contributions between Roth and traditional
IRA
s will tend to make the most sense for people
who are eligible to make both a traditional deductible
IRA
contribution and a Roth contribution and aren’t
sure whether their tax rates will be higher or lower in
retirement than they are today. Dividing contributions
between both account types allows savers to hedge:
If their tax brackets end up being lower in the future,
they’ll be glad they took the tax break up front by
making deductible contributions when those deduc-
tions were most beneficial. If their tax brackets go up,
they’ll be happy they made Roth contributions and
can take tax-free withdrawals in retirement, thereby
skirting taxes at a higher level. (As a side note, the
same logic applies to the idea of splitting Roth and
traditional contributions to a
401
(k). If you have no
idea what your tax bracket will be in retirement, why
not make both types of contributions?)
By contrast, individuals whose only choice is to make
contributions to a traditional nondeductible
IRA
and a
Roth (either directly or through the back door) will
benefit less from splitting their contributions. They’re
not receiving a tax break on their nondeductible con-
tribution; instead, they’re only getting tax-deferred
compounding, which the Roth offers, too. (So does a
good tax-efficient mutual fund, for that matter.) But
the Roth also offers tax-free withdrawals and doesn’t
necessitate required minimum distributions, making
a Roth contribution much more preferable to investing
in a nondeductible
IRA
and leaving it there.
I often see the income limits on IRA contributions
expressed as a range—for example, $178,000 to
$188,000 for married couples for Roth IRAs. What
does it mean if my income falls between those
two amounts?
What you’re referring to is what tax geeks call the
“phase-out range.” If you’re part of a married couple
filing jointly and your modified adjusted gross income
falls below $
178
,
000
, you can make a full contribu-
tion to a Roth; if it’s above $
188
,
000
, you can’t make a
direct contribution at all, but you can get in through
the back door. If it’s between $
178
,
000
and $
188
,
000
,
you’re in the phase-out range and can make a partial
contribution. Traditional
IRA
s have phase-out ranges,
too—$
59
,
000
to $
69
,
000
for single filers and $
95
,
000
to $
115
,
000
for married couples filing jointly.
The amount of your allowable contribution is deter-
mined by looking at how much you’re over the low
end of the phase-out range, then dividing that number
by the total phase-out range. For example, say a
45
-year-old married person has a modified adjusted
gross income of $
180
,
000
. Her income is $
2
,
000
over
IRA Mysteries Revealed
Portfolio Matters
|
Christine Benz
Welcome to our
new feature,
Portfolio Matters,
by Christine Benz,
Morningstar’s director of
personal finance. We’re
thrilled to have Christine
help you manage the port-
folio challenges that you
face each month.Christine
will address personal
finance issues with prac-
tical solutions through-
out the year.
