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Help a Reader: Roth IRA Income Limits and Marriage

Written by Nickel - 22 Comments

A reader name Henry wrote in with the following question:

I maxed my Roth IRA this past October and I got married in November. Our combined MAGI now exceeds $156,000. Am I ineligible for my Roth IRA now? What can I do?

As Henry correctly points out, the income limit for making Roth IRA contributions is $156,000 if you’re married and filing jointly. More specifically, your allowable contribution phases our from $156k – $166k. As for what happens if you max your contributions and then get married later in the year, I have to admit that I’ve never really thought about it from this angle. Moreover, I’m not a tax expert. That being said…

My gut feeling is that this puts him over the limit for the year — after all, the determination is based on filing status, which applies for the entire year, without any apparent accommodation for when during the year you get married. Assuming this to be true, Henry will most likely have to re-characterize the contribution (and earnings) or withdraw the funds — otherwise he’ll likely be subject to a penalty for excess contributions.

But like I said above, I’m not entirely sure. So that’s where you guys come in… If you have any insights, please share them in the comments, below.

Published on January 3rd, 2008 - 22 Comments
Filed under: Taxes

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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22 Responses to “Help a Reader: Roth IRA Income Limits and Marriage”

  1. 1
    Tony Says:

    What if he doesn’t file a joint return? For ‘07 just file separate returns. I’m no tax expert but that is what I was thinking when I read this.

  2. 2
    nickel Says:

    If you’re living together, separate returns doesn’t help… The phaseout under such circumstances is $0-$10k (presumably to combat these sorts of shenanigans). If you file separately and aren’t living together, then there is a substantially higher individual limit (somewhere in the neighborhood of $95k/person) but you risk running afoul of the IRS if you’re not actually living separately and you get audited.

  3. 3
    M.B. Says:

    In the IRS’ eyes, if you were married on 12/31/07 then you were married for all of 2007 for tax purposes, so Nickel is correct in his post.

    If you do nothing, your excess contributions to the Roth IRA (assuming your MAGI is over $166,000 and you made a $5,000 contribution, your excess contributions are $5,000 for 2007) would be subject to the 6% excise tax under IRC section 4973. You would be subject to this excise tax each year until your excess contributions are used up. What this means is that if your MAGI exceeds the Roth IRA contribution limit again next year, the entire $5,000 will still be considered excess contributions and hit with the 6% excise tax again. This will continue each year until you have no more excess contributions.

    The alternative as Nickel stated is to do a recharacterization of the Roth IRA contributions to a nondeductible traditional IRA contribution (since the MAGI limitations for deductible traditional IRA contributions are lower than those for Roth contributions you obviously are not eligible to make a deductible traditional IRA contribution). The deadline for you do complete this recharacterization is the due date of your 2007 tax return including extensions.

    If you opened the IRA with a big brokerage customer service should be able to help you do this.

    Hope this helps, I know taxes can be confusing as I deal with them all day every day.

  4. 4
    My Dollar Plan Says:

    Unfortunately it doesn’t matter when you are married during the year. Same as the tax deduction for kids, if you have baby on Dec. 31 you get the same deduction as a family that has a baby earlier in the year.

  5. 5
    Compounding Says:

    Crazy taxes. So, you got married in November… is there any documentation that would prove that you were living together, at that point? Or, I guess a better question would be, do you have any proof that would suggest you weren’t living together? Like two mortgage or rent payments for November and December?

  6. 6
    Catrijn Says:

    IRS.gov publication 590

    He needs to figure out what his contribution limit is (might not be $0, since its a phase-out). If he’s not completely ineligible, he might be able to apply the excess to a later year (e.g., count it against 2008). Otherwise, the excess contributions and their earnings (maybe none given the recent market :( ) need to be withdrawn. There’s no penalty if its done before the filing deadline.

  7. 7
    Jason Says:

    Nice of the government to further penalize those of us who get married. Would it be possible to file separately and come in under the income limits for individuals?

  8. 8
    nickel Says:

    Jason: The only way filing separately would work would be if: (1) you lied and said that you didn’t get married, or (2) you maintained separate households (or lied to claim that you did). Married filing separately, but living together, won’t work.

    Here are the numbers for the different scenarios:

    Married Filing Jointly: Roth IRA contributions phase out between $156k-$166k
    Single or Head of Household: Roth IRA contributions phase out between $99k-$114k
    Married Filing Separately, Living Apart: Roth IRA contributions phase out between $99k-$114k
    Married Filing Separately, Other: Roth IRA contributions phase out between $0-$10k

  9. 9
    Cheapster Bob Says:

    Why is everyone so ga ga over Roth I.R.A’s? It seems like traditional I.R.A.’s have been totally ignored recently and they are superior in most cases.

    I would rather put my money in tax free as there is more dollars to benefit from compound interest.

    Once you are an old fart there is little chance you will be paying a high tax rate or any tax rate at all.

    Roth is a gamble to me and traditional, at this time, is the winner. I’m for socking more money away and paying the lowest tax bracket at retirement. It is not like they are going to be charging 38 percent tax rate to seniors.

  10. 10
    Master Phu Says:

    Bob,

    With a traditional IRA you’re forced to start taking distributions by age 70 1/2. If you don’t take the amount necessary the IRS will take half of the mandatory amount. The Roth doesn’t have forced distributions so the money can be left in there to keep growing even once you’ve hit 70 years and age and don’t need the money.

    I don’t understand how you think they won’t charge seniors a high tax rate. Your age doesn’t matter to the IRS. If you’re a senior and your income is in the highest tax bracket, that’s the rate you’re going to pay. Even Social Security payments are considered income.

  11. 11
    MMoyer2655 Says:

    Thanks so much for the post. I am getting married this year and was wondering what would happen.

  12. 12
    Henry Says:

    I don’t have to produce proof that we weren’t living together do I? We didn’t. She lived with her grandparents.

  13. 13
    nickel Says:

    You lived apart after getting married? Here again, I think even part of the year is as bad as the full year.

  14. 14
    Henry Says:

    well i’m debating lying. must think…

  15. 15
    kitty Says:

    Bob, additionally to what was said about traditional IRA vs Roth, it is a mute point for most of those who participate in 401K at work. Your income must be pretty low to deduct traditional IRA. If you are in a position in which you are worried if your income is high enough for Roth, you can be sure that your income is a lot higher that the deductibility limit for real IRA.

  16. 16
    Cheapsterbob Says:

    Ah! I missed that advantage of the Roth. However, at the ripe old age of 70 I would think I might need the money I saved my entire life.

    Is the point of saving to save or to have money to spend when needed at a later date?

    The majority of people will be tapping into their IRA and using the money as intended. If you are so rich as to not need that money at 70.5 years you can pull some out and simply stick it into high yield savings or give it to charity.

    To each their own but I’m liking my money going in tax free and having a larger base for compounding interest.

    In regards to my tax comment that is simply explained. Most seniors who will be drawing off the IRA will not be making enough to qualify for anything other then the lowest tax bracket. Seniors do not spend as much as others in their cost of living.

    Who knows what will go down in the future anyway? Socialized health-care is, sadly, on the way and with the boomer’s retiring they may sway tax breaks for seniors. If you owned a Roth at that time it would screw you over big time as your returns would be much lower then the traditional.

  17. 17
    MoneyNing Says:

    This sucks but everyone is right. Your Roth IRA is not eligible. Congrats of getting married and making over $166,000 combined though!!!

  18. 18
    thomas Says:

    withdraw, move to traditional, or take a financial slap on the wrist.

  19. 19
    Tim Says:

    and Bob, if you don’t qualify for the tax deduction of TIRA, then why would you lock your funds in one and why pay more taxes on it rather than a tax advantaged mutual fund?

    as far as Henry is concerned: didn’t either of you contribute or could they have contributed to 401k to lower your MAGI? considering it is january it is a moot point. the only thing to do now is to recharacterize (but again if you don’t qualify for tax deduction why bother) or withdraw the contributions. my guess is the latter.

  20. 20
    Fletcher Says:

    Maybe you’ve already done this, or maybe it’s too late now that we’re in 2008 – but my husband and I got retroactive raises last year that also put us over the max for Roth contributions. I checked with the organization who administers the fund & they emailed me a distribution form on which we could request a distribution of “excess contributions.” They transfered the excess contributions (everything we contributed in 2007 plus the earnings on that portion) to a regular investment fund for us. We did this in 2007, I’m not sure if there’s any restrictions doing this now that we’re in 2008.

  21. 21
    kitty Says:

    Fletcher, they can recharacterize it as a regular IRA or just close up to the date tax is due.

    If they move it to regular IRA, they may be able to convert it to Roth in 2010, unless something changes. I am considering doing it myself – opening IRA for 2007, then coverting to Roth in 2010 as my capital gains put me above the max (otherwise I’d be in phase-out range). Wonder if we can trust the government not to change its mind about it. Any thoughts on the likelyhood of that?

  22. 22
    Fletcher Says:

    Kitty – sorry for not getting back sooner. Yes, true, most people have traditional IRAs as an option. I forgot about that since both my husband and I are ineligible to contribute tax deductible money to traditional IRAs. We are active participants in a qualified (government) pension, which limits how much of a contribution, if any, would be tax-deductible. the same holds for some profit-sharing, or other retirement plans. Regular tax software asks questions about this as far as I know (ours always has). Thus, for us, if we contributed to a traditional IRA, we’d be volunteering for double-taxation – at the contribution end and distribution end when we start withdrawals. My husband knows the details better than I do, so I hope I’ve described that well enough. Anyway – I guess the bottom line is that there are limits to tax-deductible contributions for some people with traditional IRAs, and flat out contribution limits on ROTH IRAs. A little homework helps each person get their options straight. It is a drag when things change at the end of the year and one can feel pressure to figure out what to do to ‘right’ something to avoid penalties.

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