Roth IRA contributions have limits based on your income. Roth IRA income limits: Your compensation counts. There are no. 2018 INCOME RANGE. You could contribute up to $5,500 towards your IRA, and if you were 50 or older you can contribute an additional $1,000 bringing your total yearly contribution limit to $6,500. The 2018 Roth IRA contribution limits won’t be released until October of this year, but we can speculate what they might be.
For years I’ve lectured about the wonderfulness of Roth IRAs. The new Tax Cuts and Jobs Act (TCJA) makes Roth IRAs even more attractive and they can provide insurance against future tax rate increases that I think are almost inevitable. Here’s what you need to know about Roth IRAs and especially Roth IRA conversions in the post-TCJA world. Roth IRAs have two big tax advantagesThe two most-important Roth IRA tax advantages are: Tax-free withdrawalsUnlike traditional IRA withdrawals, qualified Roth IRA withdrawals are federal-income-tax-free and usually state-income-tax-free too. What is a qualified withdrawal? It’s one that is taken after you, as the Roth account owner, have met both of the following requirements:1.
You’ve had at least one Roth IRA open for over five years.2. You’ve reached age 59½ or become disabled or dead.For purposes of meeting the five-year requirement, the clock starts ticking on the first day of the tax year for which you make your initial contribution to your first Roth account. That initial contribution can be a regular annual contribution, or it can be a conversion contribution.
For example, say your initial Roth pay-in was an annual contribution made on April 1, 2017 for your 2016 tax year. The five-year clock started ticking on Jan. 1, 2016 (the beginning of the tax year for which the contribution was made), and you will meet the five-year requirement on Jan. Exempt from required minimum distribution rulesUnlike with a traditional IRA, you don’t have to start taking annual required minimum distributions (RMDs) from Roth accounts after reaching age 70½. Instead, you can leave your Roth account(s) untouched for as long as you live if you wish. This important privilege makes your Roth IRA a great asset to leave to your heirs (to the extent you don’t need the Roth money to help finance your own retirement).
Making annual Roth IRA contributionsAnnual Roth contributions make the most sense for those who believe they will pay the same or higher tax rates during retirement. Annual contribution privilege is phased out at higher incomesFor 2018, eligibility to make annual Roth contributions is phased out between modified adjusted gross income (MAGI) of $120,000 and $135,000 for unmarried individuals. For 2019, the phase-out range is $122,000 to $137,000.For married joint filers, the 2018 phase-out range is between MAGI of $189,000 and $199,000. For 2019, the phase-out range is $193,000 to $203,000.
Annual contribution deadlineThe deadline for making annual Roth contributions is the same as the deadline for annual traditional IRA contributions, i.e., the original due date of your return. For example, the contribution deadline for the 2019 tax year is April 15, 2020. However, you can make a 2019 contribution anytime between now and then.
The sooner you contribute, the sooner you can start earning tax-free income. Well-seasoned individuals can still make annual Roth contributionsAfter reaching age 70½, you can still make annual Roth IRA contributions — assuming there are no problems with the earned income limitation or the income-based phase-out rule. In contrast, you cannot make any more contributions to traditional IRAs after you reach age 70½. Roth conversionsThe quickest way to get a significant sum into a Roth IRA is by converting a traditional IRA to Roth status. The conversion is treated as a taxable distribution from your traditional IRA, because you’re deemed to receive a payout from the traditional account with the money then going into the new Roth account.
So doing a conversion before year-end will trigger a bigger federal income tax bill for this year (and maybe a bigger state income tax bill too).However, today’s federal income tax rates might be the lowest you’ll see for the rest of your life. Thanks to the TCJA, the rates shown below apply for 2019. For 2020, the rate brackets will increase slightly to account for inflation. After 2020, who knows?
While the TCJA rate cuts are schedule to last through 2025, they could end sooner, depending on political developments. Consider multi-year conversion strategyConverting a traditional IRA with a relatively big balance could push you into a higher tax bracket.
For example, if you’re single and expect your 2019 taxable income to be about $110,000, your marginal federal income tax rate is 24%. Converting a $100,000 traditional IRA into a Roth account in 2019 would cause about half of the extra income from the conversion to be taxed at 32%. But if you spread the $100,000 conversion 50/50 over 2019 and 2020 (which you are allowed to do), all the extra income from converting would be probably taxed at 24%.
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The bottom lineLow current tax cost for converting + insurance against higher tax rates in future years on income that will accumulate in your Roth account = continuing perfect storm for the Roth conversion strategy. However, talk to your tax adviser before pulling the trigger on a conversion — just to make sure you’ve considered all the relevant factors.