Contributing to a Roth IRA while income tax filing status is “Married Filing Separately”?

Question

Most of 2013 I was married, though there was a portion of the year that I was single. Because my spouse and I have unusual work situations (mixture of self-employment, business ownership, and "normal" employment), we are filing separately for 2013.

I didn't realize that I cannot contribute to a Roth IRA if I'm filing separately, so my first line of research was how do I undo this, and from what I found (here), it looks as if I simply withdraw the money that I put into it. If this is incorrect, let me know.

The question I have is that if I was single for half or less of the year, could I still keep the contributions in the Roth IRA because I wasn't married for the full year? Or does 2013 officially count for tax purposes as a married year and thus even if I earned $N in income when single, I am unable to contribute to a Roth IRA for those final single months?

Answer 1

You must file as married for 2013 if you were married as of December 31, 2013.

It is true that the Roth IRA contribution phaseout for Married Filing Separately is 0 - $10K. But you can still do backdoor Roth IRA contribution (contribute to a Traditional IRA, then convert it to a Roth IRA; assuming you do not have any pre-tax IRAs, this is identical to a Roth IRA contribution).

But you already made a Roth IRA contribution for 2013, and did not do the backdoor. Let's assume that you want to turn it into a backdoor Roth IRA contribution, and that you don't have any pre-tax IRAs.

There are two ways to do this:

1. Withdraw the Roth IRA you contributed (including earnings). Then, do a normal backdoor Roth IRA contribution (contribute to a Traditional IRA, then immediately convert it to Roth IRA). The earnings you had in the Roth IRA that you withdrew will be treated as normal income and taxed. The conversion will not be taxable because all of the Traditional IRA was non-deductible when you converted.

2. Re-characterize your original Roth IRA contribution as a Traditional IRA contribution, then convert it to Roth IRA. It will be treated as if you made a Traditional IRA contribution originally, and then waited until now to convert. The earnings in the IRA up till now will be taxed on conversion.

So in both cases, you will need to pay income tax on the earnings in the account up to now. The difference between the two is in the amount of money in the IRA now. With the first way, you can only contribute $5500 now. With the second way, you will keep the same amount of money you have in the IRA now.