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IRA Contribution with maxed out income - what can i or my wife contribute into a IRA?

here are the facts: wife does not work - $0 income maxed out in my company 401(K) $22,500 * approx. $260K AGI

is there any way for my wife or I (we file married jointly) can contribute into an IRA (preferably a ROTH)?

if my wife or I do contribute into a Roth - is there a penalty? how do is this reported since it is with after tax dollars?


Nov 01, 2013 by Darren from Boulder, CO in  |  Flag
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7 votes
Peter C. Karp Level 20

Hi Darren,

Please note that Karp Capital Management does not provide tax advice, and we strongly recommend that you consult with your CPA to regarding any tax questions.

Given your income and joint tax filing status, neither of you will be eligible to fund ROTH IRA accounts, as the income limit is $188K. However, assuming you and your wife are each under 70.5 years of age, you will be able to fund two Traditional IRA accounts in addition to the 401k you already have. You can fund these accounts for this year up until April 15 of next year (2014) according to the following 2013 limits: $5,500 each if you are under 50 or $6,500 for age 50 and older. Keep in mind that since you are an active participant in your company’s 401k plan and have an Adjusted Gross Income over $179K, you will not be able to deduct either of your contributions.

Nevertheless, spousal contributions are a useful way to make contributions towards your non-working wife’s retirement, as your assets will likely be shared during retirement years.

If you have additional questions, feel free to contact our firm at (415) 345-8185.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  Nov 01, 2013 from San Francisco, CA

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Since other advisors have already identified that there is no current tax advantage for IRA contributions then you may consider building up assets in a non-qualified account. Anyone can establish an account at a brokerage firm (such as Fidelity, Schwab, or TD Ameritrade, to name a few) and build up substantial assets over time by saving into an account that is NOT a tax-sheltered account like an IRA, 401k, etc.

There is NO LIMIT to how much money you can save in accounts like these - that is entirely up to you. Additionally - working almost exclusively with individuals preparing for, or living in retirement - we routinely find that having assets in non-IRA type accounts offer significantly MORE flexibility than IRA type accounts do, because there are no complex, ever changing rules to keep track of:

  1. You are not forced to withdraw from these accounts after age 70 and 1/2 just to pay taxes on them, possibly increasing your tax bracket in retirement.

  2. You can use these accounts as collateral. While 401k accounts often allow loans, you cannot take loans against IRA's.

  3. You can "tax harvest" out of these accounts - e.g. - sell an asset that has decreased in value to offset an asset that may have increased in value - and thereby have minimal or no tax burden when you take money out of the account.

  4. You can use municipal bonds to generate tax-free income.

  5. You can gain favorable tax treatment on income using dividend strategies.

  6. At death, any unrealized capital gains within these accounts are forgiven via the "step-up in basis" rule. This is one of the biggest tax breaks average Americans get. As a contrast - all monies in an IRA are taxed at one time or another - either before, or after death.

  7. You can directly gift appreciated assets to charities, heirs, family members... or virtually anyone you want to - with no tax consequences (unless you gift millions).

  8. And my personal favorite - you can take the money whenever you want - for whatever purpose you want - and no one can tell you otherwise!!

... And the list goes on and on. NONE of these advantages apply to either IRA's or 401k type accounts.

So... even though once the dollars in an IRA grow tax deferred - since you get no current tax deduction, the reality is that you might gain considerably more benefit by building up invested dollars in an outside account.

Jon Castle http://www.WealthGuards.com

Comment   |  Flag   |  Nov 01, 2013 from Jacksonville, FL

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3 votes

Hi Darren,

Here are some thoughts. First, know that the 401(k) contribution limit increased in 2013 from $22,500 to $23,000 so you could consider increasing your 401(k) withholding before the end of this year to max out at $23k. Yesterday the IRS announced that the 2014 limit will stay at $23k for those age 50 and older and $17,500 for those under age 50.

I will assume your employer’s 401(k) plan does not allow for ROTH 401(k) contributions. You should petition your employer to add the ROTH 401(k) feature. My wealth management firm offers a 401(k) plan for employers and I can tell you from experience that adding the feature is easy and should not result in any increase in plan costs. If you had access to a ROTH 401(k) you could contribute after-tax dollars to the account but the combined contribution between the traditional 401k and ROTH 401k cannot exceed the $23,000 limit.

Based on your 401(k) contribution I assume you are age 50 or older. At your age you can contribute $6,500 to a traditional IRA. You cannot contribute to a ROTH IRA due to income limitations. ROTH IRA contributions are phased out for married couples who earn between $178k and $188k in 2013. There is no such income limit for the traditional IRA although because you are covered by a retirement plan at work and income limitations you will not be able to deduct the contribution to the IRA.

If you currently have no IRA accounts you could consider a $6,500 contribution to a traditional IRA than an immediate conversion to a ROTH IRA. The income limitation on ROTH conversions has been removed. However, if you do currently have funds in an IRA you will want to be very careful because conversion from the traditional to the ROTH can result in taxable income for some of the conversion amount. For example; let’s say you have $58,500 in one traditional IRA and all of the contributions to this IRA were pre-tax. After the 2013 $6,500 after-tax contribution to this traditional IRA you have a traditional IRA balance of $65,000 with a basis of $6,500. If you convert $6,500 (or any amount) to a ROTH 90% (58,500 / 65,000) will be taxable income in 2013. So you will have moved $6,500 into a ROTH for future potential tax-free growth but at a cost of increasing your 2013 income by $5,850. It’s also important to know that for purposes of this exercise the IRS will make you calculate the % taxable based on the total of ALL of your IRAs combined. So you can’t get around the rule by creating a new IRA for the $6,500 contribution. One last thought. If your employer’s 401(k) allows IRA rollovers you could consider rolling all of your IRAs into the 401(k) if you have no cost basis in the IRAs. That should get the IRAs out of your name and you could afterward open a new IRA to contribute the after-tax $6,500. Since this would be your only IRA and it is all after tax contribution you could then convert this IRA to a ROTH absent any tax consequences. I would double check with your tax advisor on this last strategy.

Lastly, you could open a Spousal IRA for your non-working spouse and make a contribution for her subject to the $5,500 under age 50 and $6,500 age 50 and over limits. Again, due to income limitations, it does not appear that you can deduct the spousal IRA contribution.

Hope this helps.

Comment   |  Flag   |  Nov 01, 2013 from Woodbridge, VA

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2 votes

Darren thank you for your question. Here are couple of things you can do. Since your wife does not qualify for a retirement account, she still has a right to save for retirement. As a non working spouse she is able to make a tax deductible contribution to a Traditional IRA. In your situation, since as a family you make quite a bit of income, you are no longer qualified to contribute to a Roth IRA, however you are also able to make a NON deductible contribution to a Traditional IRA, then turn around and convert that in to a Roth IRA account. You should talk to a CPA to make sure you are covering all the basis, however this is one way for you to build out a Roth account. Now if you have multiple Traditional IRAs where you made some deductible and some non deductible contributions then conversion is not so simple it will be prorated, and that is where a CPA would come in to play. For your spouse she can then turn around and convert to Roth as well, however that would be taxable to her. There are quite a few strategies, where you can try to minimize taxes on it, one of them is: Lets say you converted 5k and purchased an investment that went down in value, well you have until the end of the year to re-characterize it back in to a regular IRA, and convert again just a smaller amount, there for minimizing your taxes. Also depending on how much you are converting and what are you looking to purchase there might be quite of few other choices to help you with you taxes. I would seek help from a Planner that actually understands different ways to convert and different strategies that can be implemented can assist you. I hope this helps, please let me know if you have any questions as we have substantial experience in this area. Best of Luck Sincerely Michael Mezheritskiy, Founding Partner Visionary P.W.M.G.

2 Comments   |  Flag   |  Nov 01, 2013 from Farmington, CT

thanks - good advice.

Flag |  Nov 01, 2013 near Boulder, CO
Michael V Mezheritskiy

You very welcome!

Flag |  Nov 01, 2013 near Farmington, CT

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2 votes

With an AGI of $260,000 neither you nor your wife are eligible to contribute directly to a Roth IRA.

However, you are each eligible to contribute to a Traditional IRA on a non-deductible basis. Her IRA would be a Spousal IRA. The growth would be tax-deferred in the IRA. You would need to track your basis on Form 8606 that is filed with your tax return. When you take contributions from the IRA or convert the IRA the basis is used in a pro-rata fashion. There is no time limit that the contribution is require to stay in the Traditional IRA before being converted.

For example: You make a $5500 contribution for this year. You already have a $6500 Traditional IRA. This gives you an IRA with a $12,000 balance and $5500 in basis. If you convert the entire IRA then you only pay tax on the $6500 portion. The $5500 basis in not taxable. If you don't have any Traditional IRAs currently then the $5500 basis that gets converted is not taxed. This is why I said you can't contribute directly to a Roth IRA.

Hope this helps.

2 Comments   |  Flag   |  Nov 01, 2013 from Fresno, CA

very good - I think we will contribute some into a traditional.

Flag |  Nov 01, 2013 near Boulder, CO
Jeff Karst, CFP®

You should talk with a Tax Advisor or Financial Planner before taking any moves. Without seeing your entire situation, it is difficult to have a good analysis. There are things that could be missed.

1 like | 
Flag |  Nov 01, 2013 near Fresno, CA

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