New Roth IRA Rules for 2013

Guess who’s getting a raise in 2013!

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The Roth IRA is getting a raise in 2013! The Internal Revenue Service recently announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2013. The limit on annual contributions to traditional IRA and Roth IRAs will both rise to $5,500, up from $5,000 in prior years. The Economic Growth and Tax Relief Reconciliation Act of 2001, signed into law by President Bush, increased contributions to from $3,000 to $4,000 and tied future increases to inflation. The last increase for Roth IRAs was in 2008.

Not everyone can make a direct contribution to a Roth IRA. There are income limits phasing out a taxpayer’s ability to contribute. Those limits will also increase in 2013. Single taxpayers and heads of household who are covered by a retirement plan at work begin to phase out contributions when modified adjusted gross income (MAGI) is between $59,000 and $69,000. Joint filers in which an IRA contributor not covered by a retirement plan and is married to someone who is covered phase out when MAGI is between $178,000 and $188,000.

Anyone whose income is above these thresholds can still get money into a Roth IRA in a round-about way. There are no income limits for making a non-deductible IRA contribution. Since 2010, there are no income limits for converting a traditional IRA to a Roth IRA. A high income taxpayer simply makes a non-deductible contribution to an IRA and then converts it to a Roth IRA. This strategy of indirectly contributing funds into a Roth IRA will not be effective for taxpayers who already have substantial amounts invested in a traditional IRA because of the “pro rata rule.” This rule requires a taxpayer to include all IRA assets when determining the taxes due on a Roth conversion. While investing indirectly in a Roth IRA isn’t appropriate for everyone, it can provide a viable option to those with higher incomes who are otherwise unable to contribute to a Roth.

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