It’s not too late to make IRA contributions for 2013. If you make a qualifying IRA contribution before April 15, 2014, you can elect to report it on your 2013 or 2014 individual income tax return. You can contribute up to $5,500 ($6,500 if you are age 50 or over) each year.
There are contribution limitations and adjusted gross income levels for contributing to IRAs and Roth IRAs. If your modified adjusted gross income (“MAGI”) is too high, you still will not be able to contribute to a Roth IRA. Specifically, the $5,500/$6,500 permitted contribution to a Roth IRA is reduced ratably if your MAGI is between $112,000 and $127,000 for single, head of household, or married filing separate and you did not live with your spouse during 2013 taxpayers ($114,000-$129,000 in 2014), between $178,000 and $188,000 for married filing jointly or qualifying widow(er) taxpayers in 2013 ($181,000-$191,000 in 2014), and between $0.00 and $10,000 for married filing separate and you did live with your spouse during 2013 or 2014.
There used to be a limitation if you converted all or part of your traditional IRA (or other qualified retirement plan) to a Roth IRA based upon your income. Prior to 2010, you could only convert to a Roth IRA if your MAGI was under $100,000. Beginning in 2010 and thereafter, however, that MAGI $100,000 limitation is entirely eliminated.
The concept of MAGI may confuse you, as it has for many other people from the very start. After you determine your adjusted gross income from your 1040 return, you then figure MAGI by adding back certain items like the foreign earned income exclusion, deductions for foreign housing, interest income for series EE bonds that you excluded because you used the proceeds to pay for qualified educational expenses, deductions that you may have claimed for student loan interest or allowable tuition expenses, etc.
Two other items are important to keep in mind for this calculation. Required distributions from your traditional IRA after you reach age 70½ do not count against the MAGI. Also, funds converted from a traditional IRA to a Roth IRA do not count against your MAGI even though they may be taxable. There are more intricacies to this MAGI calculation, but this brief description should help.
You will have to pay ordinary income tax at your tax rate on the amount converted from traditional to Roth IRA. The benefits of converting to a Roth IRA or not, should be obvious after appropriate financial counselling. There are no required minimum distributions after age 70½, growth in the Roth IRA is tax deferred, distributions from a qualified Roth IRA are tax free, you can still contribute to a Roth IRA after age 70½ (unlike a traditional IRA), contributions are made with after-tax dollars, etc.
Finally, it sometimes makes sense for you as a Roth IRA owner to convert your Roth IRA back into a traditional IRA, perhaps due to a greater income tax liability than anticipated or other realities. This “recharacterization” allows you to “undo” up to your entire current year Roth IRA conversion. You must recharacterize your Roth IRA by October 15th, the extended filing date of your current year income tax.
Once again, there are more issues regarding the recharacterization from Roth to traditional or vice versa, including “anti-cherry picking rules” put in place by the IRS. Make sure you get proper counselling from a trusted financial advisor to make the best informed decision for you and your family.
By: Matthew Wallace, CPA, JD
Published edited March-April, 2014 in Savvy magazine as: There is still time to make your IRA contribution in 2013