Roth IRA fear of overcontributing question - what should I do?

[kiwi71]

I have been maxing out my and my wife's Roth IRA (she has been in nursing school) for the last several years. Early next year I will be PCSing from a US territory back to CONUS and my wife recently started and will continue to be working as an RN full-time. So, since much of my PCS benefits is considered income, with my salary (GS-13) and my wife's, I am concerned that our 2012 MAGI might very well fall in 2012's Roth $173-$183K range. I am not complaining as I know it is a problem I am blessed to have, but I am concerned about continuing my monthly contributions and then finding that I have overcontributed or that I am not elegible at all. I do the $333.33 per month per account and drop the extra $1000 per account here and there when I think the market is right for it.

I have my account with USAA and one of their reps tried to tell me it is not a problem at all if they correct it by April 15, 2013, after I do my taxes and know exactly what my MAGI is. He was saying I should continue to contribute as I have been. However, my boss had a similar problem. He needed to correct for a couple of years and he said it was a nightmare (with USAA no less), plus he was penalized a substantial amount. I don't know if I would be penalized if it is corrected within the same year, but value changes throughout the year and dividends and such are paid out in December. I don't see how it can not be complicated.

Does anyone have any experience with this? What would you do? Should I put the money aside in savings or a money market fund and after I do my taxes determine what I can put in? I realize that will eliminate any dollar cost averaging benefits, but do I want the headache of having to pull the money out of the Roth account?

Please advise. Thanks a lot.

 

[alevin]

I can't speak to your problem, kiwi, not directly. For me, its more a matter of making sure I don't underbudget for my other anticipated expenses through the year. so I save a certain amount every month for Roth, and will be ready by January to fully fund the 2012 contributions at start of the year. I did that last year too.

In 2010, I funded the 2010 account at end of the year when was sure didn't need those funds for 2010 unexpected expenses (and saved up for 2011 Roth through 2010 also). benefits of paying off the mortgage early. more to put into retirement savings.

 

[kiwi71]

I can't speak to your problem, kiwi, not directly. For me, its more a matter of making sure I don't underbudget for my other anticipated expenses through the year. so I save a certain amount every month for Roth, and will be ready by January to fully fund the 2012 contributions at start of the year. I did that last year too.

In 2010, I funded the 2010 account at end of the year when was sure didn't need those funds for 2010 unexpected expenses (and saved up for 2011 Roth through 2010 also). benefits of paying off the mortgage early. more to put into retirement savings.

Thanks. At least I know now I wouldn't be doing anything unusual by just putting that money aside and waiting until my taxes are prepared.

 

[EW_ret]

Are you contributing to the Thrift Saving Plan (TSP)? The money you put into your TSP account reduces your Adjusted Gross Income for income tax purposes, and this helps, allowing more to go into the Roth IRA if you are near that 173, 00 point. You talk about PCSing to CONUS, but state you are GS-13. If you are federal civilian employee, and FERS, you get a government match up to 5%, so it makes sense to put in at least 5%. If military, you don't get a match, but putting money into a TSP account will reduce your Adjusted Gross Income for income tax purposes.

 

[kiwi71]

Are you contributing to the Thrift Saving Plan (TSP)? The money you put into your TSP account reduces your Adjusted Gross Income for income tax purposes, and this helps, allowing more to go into the Roth IRA if you are near that 173, 00 point. You talk about PCSing to CONUS, but state you are GS-13. If you are federal civilian employee, and FERS, you get a government match up to 5%, so it makes sense to put in at least 5%. If military, you don't get a match, but putting money into a TSP account will reduce your Adjusted Gross Income for income tax purposes.

Oh yeah, I've always put between 5-15% into TSP, never less than 5%. It's been closer to 5 the last few years as it was tough to get that $10K into the Roth for the wife and I while she was in school and not working. Yes, I do get the matching.

 

[kcpilot81]

Oh yeah, I've always put between 5-15% into TSP, never less than 5%. It's been closer to 5 the last few years as it was tough to get that $10K into the Roth for the wife and I while she was in school and not working. Yes, I do get the matching.

If you are lucky enough to not have any tax-deferreed (i.e. pre-tax money in any IRA accounts), there is an end around which is fairly easy, following the steps below:

1) Put $5000 post-tax money into an IRA account.
2) Immediately transfer that money into a Roth-IRA through a distribution with your broker.
3) Assuming you performed this immediately, there is no tax implication as you have no gains. If you do have gains, you will have to pay taxes on those gains, but this will likely be less than $5.

While there is an AGI limit on direct contributions to a Roth-IRA, you can contribute the max into an IRA (the limitation with an IRA is only that you cannot later deduct that money unless your AGI is below a certain threshold). Currently, there is no AGI limit on converting an IRA to a Roth-IRA.

I have done this the past two years, and I now have a Roth-IRA with $15k in contributions despite my income being above the AGI limit for a Roth-IRA.

Good Luck!