Roth IRA catch-up contribution question

[chessknt]

Hi everyone, long time reader, first time poster.

I have scoured the internet trying to find an answer to this and hope someone here knows.

I (will) make 100k this year in wages at my job and am looking into opening a roth IRA. I am 28 and am wondering if I am able to contribute 5k (beyond the 5k annual limit) in catch-up contributions for previous years, despite the fact that the last 5+ years I did not have a job with earned income.

So my question is: Can I use my income from this year for catch-up contributions despite having no earned income in prior years?

Thanks!

 

[LOL!]

No. You are only able to contribute for 2011 if you had at least $5,000 in compensation in 2011 and you have until mid-April (tax return deadline) to do so. If you have compensation in 2012, then you can contribute $5,000 but watch out for maximum modified adjusted gross income limits. Even so, there is something called a "back-door Roth" to get around MAGI in some cases.

Also "catch-up" is usually used to designate the extra $1000 contribution that folks who will be age 50 at year-end can make. If you are searching the internet, that "catch-up" will add more noise to your search results.

 

[Animorph]

No. You are only able to contribute for 2011 if you had at least $5,000 in compensation in 2011 and you have until mid-April (tax return deadline) to do so. If you have compensation in 2012, then you can contribute $5,000 but watch out for maximum modified adjusted gross income limits. Even so, there is something called a "back-door Roth" to get around MAGI in some cases.

Also "catch-up" is usually used to designate the extra $1000 contribution that folks who will be age 50 at year-end can make. If you are searching the internet, that "catch-up" will add more noise to your search results.

+1

Income limits start rolling off your contributions starting at $110k if you're single and $173k if filing jointly for 2012. Contribute while you can.

 

[ronocnikral]

this is why I think contributing to a ROTH IRA is a bad idea for reasons like first time home purchase and education savings. It is use it or loose it. Once April 15th of the following year goes by, so does an opportunity to invest in a IRA. And IRA's are a very powerful retirement investment tool.

I would encourage some healthy study of the benefits of a Roth, traditional accounts (both pre-tax & non-deductible) and taxable. A lot of people get caught up in the "tax-free" growth of a Roth account, but don't fully understand how they can be the same as a TIRA. It really boils down to what you think tax rates will be in the future relative to what they are now (and if they are the same, a roth and trad account are more than likely the same). And a few other things like accessibility to money, some limited estate planning considerations etc. should play into your decision.

 

[NOLA Rob]

this is why I think contributing to a ROTH IRA is a bad idea for reasons like first time home purchase and education savings. It is use it or loose it. Once April 15th of the following year goes by, so does an opportunity to invest in a IRA. And IRA's are a very powerful retirement investment tool.

I would encourage some healthy study of the benefits of a Roth, traditional accounts (both pre-tax & non-deductible) and taxable. A lot of people get caught up in the "tax-free" growth of a Roth account, but don't fully understand how they can be the same as a TIRA. It really boils down to what you think tax rates will be in the future relative to what they are now (and if they are the same, a roth and trad account are more than likely the same). And a few other things like accessibility to money, some limited estate planning considerations etc. should play into your decision.

But here the income is 100k, which exceeds the limit for a traditional deductible Ira right? So his choice is between a traditional non-deductible Ira, Roth Ira, and taxable account. In this situation the Roth is the best option. Or am I missing something? And once he goes over the Roth limits, the back door Roth would be the best.

 

[Koolau]

As shared before, the Fairmark site Fairmark.com has pretty good info on Roths and other savings vehicles.

I know we all have our opinions about Roth IRAs and I am an unabashed cheerleader for them. At OP's age, I would think Roths offer 1) a disciplined savings vehicle 2) tax free earnings 3) flexibility (emergency withdrawals of principle) 4) Larger savings since the taxes have been paid. I'd be all over this opportunity, myself.

I'm sure there are other advantages (and, yes, there are disadvantages). Still, I wish at 28 I had had this golden opportunity. Now, I'm paying a relatively hight tax price for using tax deferral (only vehicle possible for much of my c@reer). Don't forget, YMMV.

 

[ronocnikral]

But here the income is 100k, which exceeds the limit for a traditional deductible Ira right? So his choice is between a traditional non-deductible Ira, Roth Ira, and taxable account. In this situation the Roth is the best option. Or am I missing something? And once he goes over the Roth limits, the back door Roth would be the best.

I think you will see that it is VERY difficult to decipher what is "best." First, we have no idea about the OP's tax status. They could file married jointly, in which case the IRA is deductible. We also don't know if they are covered by a plan at work. We also don't know what their portfolio looks like. We also don't know what their plans and goals are.

One of the points I was trying to make is people need to think more about these decisions before they just jump into them. I am in a similar situation to the OP (age/salary), but I file jointly, I have over $300k in investable assets, which about 60% are Roth IRA funds. Being in as high of tax brackets as I am, and my goals, I would prefer to put my money in the following vehicles: 1) deductible IRA, 2) taxable accounts, 3) Roth IRA. I actually make too much to contribute to a deductible IRA, but I don't get really excited about paying 25% tax on my money. Yes, you come out a ahead with the Roth, but I like the flexibility the taxable money gives me. Maybe in a few years a Roth will be "best" for me?

I don't think the Roth IRA is a "good" decision for me and my family right now. Yes, YMMV.

 

[NOLA Rob]

I would prefer to put my money in the following vehicles: 1) deductible IRA, 2) taxable accounts, 3) Roth IRA. I actually make too much to contribute to a deductible IRA, but I don't get really excited about paying 25% tax on my money. Yes, you come out a ahead with the Roth, but I like the flexibility the taxable money gives me. Maybe in a few years a Roth will be "best" for me?

That is really interesting. Is it just the ability to use the future gains at any time that makes you prefer taxable over Roth in your circumstances (where you are over trad Ira limits)? I may be over the Roth limits for the first time this year, but I've been planning on doing a back door Roth on the premise that it allows me to take taxable money and avoid future taxes on them. My thought is that I'd rather shelter those gains than not shelter them. Is there anything else that makes you prefer taxable other than the flexibility (which I assume is the ability to spend the gains because you can always withdraw contributions if you are past 5 years)? What is the harm in this case to doing a back door Roth that you would be concerned about (and which I should then be concerned about)?

 

[ronocnikral]

NOLA Rob, I don't think there is "harm" to be done by saving money for retirement.

And yes, I desire the flexibility of the taxable funds. I don't know what your goals are or what your diversification is across your retirement accounts.

It should also be pointed out that a "backdoor" Roth isn't a "good" option for me (if I'm fortunate enough to be above the Roth IRA contribution limits again this year). I rolled over my 401k into an IRA, so I would have to do the non-deductible IRA conversion pro-rata.