Ask Kim
Beyond Roth's Income Limit
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
January 7, 2002
We already contributed $2,000 to each of our Roth IRAs for 2001, but I ended up getting a year-end bonus that made us exceed the $160,000 income limit. Is there anything we can do before filing our taxes to avoid being penalized?
Before doing anything make sure you really did exceed the cut-off. The income limits for contributing to a Roth ($160,000 for couples filing jointly; $110,000 for singles) are based on your adjusted gross income, not your salary.
If you sold stocks for a loss, contributed to your 401(k), paid alimony or self-employment tax, your AGI may be less; if you earned taxable interest, received dividends or capital gains it could be more. TaxCut's 2001 Refund Estimator can guide you through the calculation. (Your AGI will appear on the "adjustments" page.)
Even if your AGI exceeds the limit, you can avoid a penalty by moving your 2001 Roth contributions to traditional IRAs before the tax deadline. The process is called "recharacterizing" and is really quite simple. Ask the brokerage or mutual fund firm that holds your IRA to make a "trustee-to-trustee transfer," which moves the money directly from the Roths to traditional IRAs. You won't be taxed on the transaction, but you'll need to include Form 8606 with your taxes to let the IRS know what happened. For more details and several examples, read the IRS's Instructions for Form 8606.
The process is the same if you converted a traditional IRA to a Roth in 2001 and need to unconvert because your AGI exceeded the $100,000 limit for conversions.