Married couple question

[Keyboard Ninja]

In the middle of of Andrew Tobias's "The Only Investment Guide You'll Ever Need" and had a question:

Married couple with an AGI of less than $150k/year. They both max out their 401k/TSP, and the husband contributes $5000/year to a Roth IRA. If the wife contributes an additional $5000/year in a Roth IRA under her name are there any negative tax implications? This assumes that the yearly income doesn't change, and instead of storing money into a savings account or their mattress they put it in a Roth IRA.

 

[travelover]

I don't see a downside.

 

[GoodSense]

I think this is a good question for your tax accountant. For a married couple, somewhere in the low $100s, the IRS begins to limit how much money can be put into a Roth IRA. I don't know what the exact numbers are, and it changes every year. If you over contribute to your Roth, you'll have to undo it per IRS rules. That's my understanding, at least.

 

[jblack]

Don't see any downside other than the normal Roth restrictions & penalties on early withdrawals, although as GoodSense points out there are AGI limits on contributions. If you are filing taxes jointly then the phase-out rules would apply to each individual Roth account equally.

Last year DW and I had a 'good' problem in that our AGI went higher than expected after we had already each contributed $5k to our Roths. We had to go back and have a portion of each "recharacterized" into a normal after-tax IRA due to the phase-out limits. Kind of a hassle but no complaints.....

 

[Nords]

If the wife contributes an additional $5000/year in a Roth IRA under her name are there any negative tax implications?

No. The Roth contribution phaseout begins at a higher level ($160K?) and the couple still has the same AGI.

The advantage is that the Roth compounds tax-free and doesn't require RMDs. Can't enjoy the same benefit with a taxable account or a conventional IRA.

Did Tobias say something to imply otherwise, or did this thought just pop up while reading about investments?

 

[Urchina]

We've done this and have not experienced any negative tax consequences as a result. Indeed, we expect positive tax consequences when we withdraw the funds, tax-free, during retirement!

 

[jIMOh]

The negative tax implications are that 10k is being taxed at current rates (this might not be bad, but paying taxes is the negative side to this). If couple is eligble for Roth, that means either 15% or 25% federal taxes are being paid.

AGI does not determine taxable income though- there are deductions which enter into the equation before tax bracket is known. For example my wife and I have an AGI around 110k (25% bracket) but after deductions our taxable income is 63-65k (15% tax bracket).

 

[Keyboard Ninja]

Did Tobias say something to imply otherwise, or did this thought just pop up while reading about investments?

I was reading the ROTH IRA section when I looked up and noticed a female in a "form fitted" flight suit walking by. I suppose the thought just came to me right afterwards

 

[OAG]

This assumes that the yearly income doesn't change, and instead of storing money into a savings account or their mattress they put it in a Roth IRA.

Not sure what you mean by "savings account" but you can have ROTH funds in Certificates of Deposit (FDIC to $250K for each account holder). But I am sure you knew that!

 

[Nords]

I was reading the ROTH IRA section when I looked up and noticed a female in a "form fitted" flight suit walking by. I suppose the thought just came to me right afterwards

I've never seen a flight suit or a set of submarine coveralls that wasn't "form fitted"... and fitting more tightly every year...

In 2002, 20% of the Air Force's married enlisted personnel had military spouses-- double the rate of the other services.

America's Military Population demographic study.pdf - Windows Live SkyDrive

 

[hcho3528]

Income limits

As with many tools that offer tax advantages, Congress has limited who can contribute to a Roth IRA, based upon income. A taxpayer can only contribute the maximum amount listed at the top of the page if their Modified Adjusted Gross Income (MAGI) is below a certain level (the bottom of the range shown below). Otherwise, a phase-out of allowed contributions runs proportionally throughout the MAGI ranges shown below. Once MAGI hits the top of the range, no contribution is allowed at all, however a minimum of $200 may be contributed as long as MAGI is below the top of the range (e.g. A single 40 year old with MAGI $115,990 may still contribute $200 to a Roth IRA vs. $30). Excess Roth IRA contributions may be recharacterized into Traditional IRA contributions as long as the combined contributions do not exceed that tax year's limit. The Roth IRA MAGI phase out ranges for 2008 are:

• Single filers: Up to $101,000 (to qualify for a full contribution); $101,000-$116,000 (to be eligible for a partial contribution)
• Joint filers: Up to $159,000 (to qualify for a full contribution); $159,000-$169,000 (to be eligible for a partial contribution)
• Married filing separately (if the couple lived together for any part of the year): $0 (to qualify for a full contribution); $0-$10,000 (to be eligible for a partial contribution).

The lower number represents the point at which the taxpayer is no longer allowed to contribute the maximum yearly contribution. The upper number is the point as of which the taxpayer is no longer allowed to contribute at all. Note that people who are married and living together, but who file separately, are only allowed to contribute a relatively small amount.
However, once a Roth IRA is established, the balance in the account remains tax-sheltered, even if the taxpayer's income rises above the threshold. (The thresholds are just for annual eligibility to contribute, not for eligibility to maintain an account.)
To be eligible, you must meet the earned income minimum requirement. In order to make a contribution, you must have taxable compensation (not taxable income from investments). If you make only $2000 in taxable compensation, your maximum IRA contribution is $2000.