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Roth IRA Basics

Here are some of the basics of Roth IRAs. 

Income thresholds for Roth IRA. To be eligible to contribute to a Roth, you must have taxable income. Next, you must have a modified adjusted gross income (MAGI) (modified specifically for purposes of determining your Roth eligibility) that is under a certain threshold.

The MAGI thresholds in 2009 are as follows:

• If you’re married filing jointly, $176,000 with a phase out beginning at $166,000.
• If you’re single or married, filing separately, and you did not live with your spouse at all during the year, $120,000, with a phase out beginning at $105,000.
• If you’re married, filing separated, and you did live with your spouse for at least part of the year, $10,000, with a phase out beginning at $0.

Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return modified as follows:

Plus:
1. Traditional IRA Deduction,
2. Student loan interest deduction,
3. Tuition and fees deduction,
4. Domestic production activities deduction,
5. Foreign earned income exclusion,
6. Foreign housing exclusion or deduction,
7. Exclusion of qualified bond interest shown; and,
8. Exclusion of employer-provided adoption benefits.

Subtract:
1. Roth IRA conversions,
2. Roth IRA rollovers from qualified retirement plans; and,
3. Minimum required distributions from IRAs

How much can you contributeto a Roth IRA? If you are eligible to contribute to a Roth IRA prior to the phase out limits, the maximum contribution is $5,000 or your taxable compensation, whichever is higher. If you are over 50 years old, the limit rises to $6,000. The extra $1,000 is considered a catch-up contribution. If you’re also contributing to a traditional IRA, however, the total of your IRA contributions (traditional + Roth) is still limited to either $5,000 or your taxable compensation.

Some other exceptions also apply: People who worked for employers who went bankrupt in previous years are, in some cases, allowed to make additional “catch-up” contributions. This is a limited exemption to employees of bankrupt companies that had a 401k plan that match contributions at a rate of at least 50% in company stock. The company or an employee also had to have been part of an indictment as part of the bankruptcy. Employees of airlines who went bankrupt may be permitted to make special contributions from airline payments.

Some types of income are ineligible for Roth contributions. There are some types of income ineligible for contributions to a Roth IRA. You can’t use capital gains, dividend income, interest income, and income from rental properties to contribute to a Roth IRA. (If you have other income, that won’t matter, but if you happen to make most of your money from investments, this could be an obstacle to establishing a Roth IRA.)

Unlimited Roth Conversions Coming in 2010. I hope this outline of requirements helps you to understand your likely eligibility for a Roth IRA. Remember, too, even if you’re not eligible to contribute to a Roth in 2009, you will be eligible to convert a traditional IRA to a Roth in 2010 if you want to. So, I’d recommend making a non-deductible contribution to a traditional IRA for the 2009 tax year and converting it to a Roth IRA in 2010.

If you have any question about Roth IRAs, please feel free to email or call me.

Derek Pilecki
Gator Capital Management
(813) 282-7870
derek.pilecki@gatorcapital.com