Roth IRA Eligibility & Non-Fixed Income

In 2014, one is eligible if their AGI is under $114,000 as a single person and $181,000 for a married couple ($5500 per person max.) For a single person, between $114k and $129k your contribution amounts begin to phase out, with no contribution allowed when you earn over $129k. [estimate your AGI here]

Sans contributing a bunch of money to charity, getting your AGI down is a bit of a challenge and mostly impossible. Trust me, when I was in my early 20s and making $50k a year I would have loved to have this problem, but given cost of living is so high where I live (our 825 square foot 1 bedroom is $2250 a month without any utilities included!) monthly income disappears fast. Your AGI includes any income received from employment AND dividends (so us dividend investors have even higher AGIs even if we automatically reinvest any proceeds, which sucks.) Then you get to deduct only your IRA/401k contributions, student loan interest, alimony, moving expenses, 50% of self-employment tax, and a few other things that aren’t relevant to most working people. In other words, outside of the $17.5k maximum for a 401k, you can’t really lower your AGI.

Investing in a Roth IRA is one way to get some tax advantages for a long-term retirement account. I’ve already maxed out my 401k for 2014 ($17.5k) which reduces my AGI but probably not enough to qualify for a Roth. Meanwhile, a traditional IRA benefits phase out at much, much lower income levels, so investing in a traditional IRA as a “high” income earner is almost pointless (even though you can’t take a deduction, if you open a traditional IRA you can still earn tax-free growth until you take you your money later in life, but it really isn’t a great benefit and you are locking your money away for the long term vs just investing it in a taxable account.) 

For a traditional IRA and you are covered by a 401k plan at work, if you are single you can only take a deduction if you make under $70k ($60k before phase out.) What’s really f’d up is that these rules apply to every place in the country and don’t take into account cost of living (but that’s a post for another day.)

What I’d like to do is invest $5500 in a Roth IRA this year, but I’m likely going to be ineligible. What’s most confusing is figuring out how to determine AGI when you’re on the borderline of contribution limits and have a large bonus that you may or may not receive. I know, it’s a good “problem” to have – but I don’t want to open a Roth IRA now and have to reclassify it as a traditional IRA with no tax benefits (other than not having to pay any tax on any profits until I take the account out at retirement, but in such accounts I also cannot take capital loss for any poor performing investments, so the tax savings would likely be a wash unless I’m lucky.)

If I earn 0% of my bonus, my AGI is $105k (that’s not including the $17.5k I put into my 401k and $2500 into my FSA.) Then I definitely qualify. But if I earn my whole bonus then my AGI is $135k and I do not qualify. (It’s actually a little more complicated because I earned less at my last job so this year my income won’t be that high anyway, but regardless it will fall somewhere between full Roth IRA allowed and no contribution allowed.

I’d also like to do a Roth IRA conversion for all of my existing IRA accounts, but I messed that up last year when I moved my 401k from an earlier job of about $20k over to an IRA. Now if I do the conversion from IRA to Roth I have about $30k where the profits will be taxed. I’m still considering doing that now, but it doesn’t make sense at all in my income bracket. I’m considering taking some time off when I have kids later in life, so potentially that would be the year to do the conversion, but then I’ll (knock on wood) be married and (knock on wood) my husband will be making too much money.

(In related news, my bf opened his first Roth IRA last year per my encouragement. He keeps joking on “all the money” he has made from it ($12 as of a month ago, $75 as of today) but he agrees it was a good idea to open the account. It kills me that with his income and super-low tax brackets through his 20s he has waited until being 30 to open a Roth IRA — so many wasted years of tax-advantaged savings. Now he finally is in a higher tax bracket so the advantages are minimized and will be poof gone as soon as we get married.)

 

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3 comments

  1. Hi there! This blog post couldn’t be written much better! Looking through this article reminds me of my previous roommate! He constantly kept preaching about this. I will send this post to him. Pretty sure he’s going to have a great read. Many thanks for sharing!|

  2. Emily1114 says:

    Just do the backdoor Roth IRA (non-deductible IRA and immediately convert to Roth IRA so you won’t owe any additional taxes).

    1. Joy ( User Karma: 0 ) says:

      That would work except I have $60k in IRA that I transferred from a 401k, so if I do the Roth IRA conversion I have to pay taxes on not only the $5500 put in for the year but the entirety of my IRA portfolio. This is crappy for the 401k funds as they weren’t taxed at all yet, so I’d have to pay a lot of tax on them.

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