Reached the AGI for Roth IRA - now what?

Question

For the past seven years, I've been contributing to my Roth IRA the max yearly amount.

However, this year, my AGI will be above the maximum allowed amount.

Couple questions...

1) Am I able to contribute to my Roth IRA for the duration of the year that my earned income has not met that amount? For instance, if my AGI doesn't meet the maximum cap until September, can I contribute from Jan thru Aug, and stop contributing Sept thur Dec when my year to date earnings will exceed the AGI max?

2) If I am now ineligible to contribute to my Roth IRA, do I have to extract my current balance and reinvest? Or can I just let the account sit there and grow, and never touch again? (Unless my employment changes and I begin to earn less than the AGI amount once more.).

3) If a Roth IRA is no longer an option to me, what are the next best alternatives. When I began working 7 years ago and set it up, the financial planner I met with had told me at the time to max out the 401k and Roth IRA and I should be good to go. This is what I have been doing. However, with no Roth IRA in the picture, not sure what my best interest would be now for the money I would have contributed to the Roth.

Answer 1

1) Indeed, if referring to a Roth as the question is, you are right on. But - You can deposit to an Traditional IRA (TIRA). You just can't deduct it. You are then permitted to convert that to a Roth any time. Now, this would appear to negate income issues, right? Not so fast. When you convert, all TIRA accounts must be considered. In other words, when it comes to the TIRA, you only have One TIRA, the "A" actually standing for Arrangement, not account. That TIRA may then be spread over as many accounts as you have time to set up. So, if there is any pretax money and/or untaxed gain, it will be prorated and taxed based on your conversion amount.

If any of this is not 110% clear, please comment and I will update the answer.

No 401(k) at work?

Note: I edited as my original wording misunderstood the response, and in turn, appeared a bit unkind. Not my intention.

Answer 2

1) Your IRA contribution amount is based on your yearly income, and if you exceed the cutoff (http://www.irs.gov/retirement/participant/article/0,,id=202518,00.html) for the year, then you are not eligible to contribute at any point during the year.

2) No - the AGI limits just apply to new contributions. You can still have an IRA, you just can't add to it. If your income drops, then you will be eligible again.

3) If you have high-deductible insurance, then I think that an HSA is the best place for your money. It works like an IRA, as you can withdraw money when you retire, but you can also use the money now for health expenses.

There aren't really many other options. Tax benefits aren't generally offered to people making as much as you will be.

Answer 3

So. You might be looking at the world of investing after tax deductions are gone. Buy index funds, or a few stable stocks of your choice. (Index funds have minimal turnover, so you won't realize as many uncontrollable tax events throughout the year). The top long-term capital gains rate is presently 15% (will it go up to 20% soon? who knows! it might. That's up to Congress and Obama, really.) If you can control when you realize it (say, in a year when you don't have a lot of other income) the tax consequences aren't toooo horrible. (It also helps if you live in a state that doesn't tax the gains themselves, e.g. not California?)

Or buy real estate, if you don't own the house where you live already (and your lifestyle permits). You shouldn't expect impressive capital appreciation, but you don't have to pay tax on the imputed rent (the rent money you avoid paying by owning the place yourself).

Answer 4

If you're maxing out your 401k, just save in tax-efficient investments like stocks and tax efficient funds.

If you live in a state with income taxes, look at municipal bond funds for some tax-free income. In 2011, be careful with bond funds and look for short duration funds.