2012 Roth IRA Rule Changes

What are the 2012 Roth IRA rule changes?

It’s important to pay attention to any upcoming changes in the rules, because modifications in the maximum contribution limits, annual income limits, or other factors can throw a wrench right in the middle of your retirement plans. So let’s take a look at the latest information from the IRS.

2012 Maximum Roth IRA Contribution

Between 2011 and 2012, the IRS made no changes to the maximum Roth IRA contribution.

Just as in 2011, the maximum amount you can contribute to your Roth IRA in 2012 is:

• $5,000 if you’re under age 50
• $6,000 if you’re age 50 or older

Keep in mind that you qualify for the $6,000 maximum contribution as long as you turn 50 years old on any calendar day in the calendar year. So, for instance, let’s say you turn 50 years old on December 31, 2012. You can contribute $6,000 to your Roth IRA for the 2012 tax year on May 1st, even though you’ll technically only be 49 years old when you make the actual contribution.

However, even though the maximum contribution limit didn’t change between 2011 and 2012, not everyone is eligible to make the maximum contribution. Due to their income, some people have smaller contribution limits or earn too much to make any contribution at all. That’s because the IRS sets income limits that determine who is and isn’t eligible to make a Roth IRA contribution.

2012 Roth IRA Income Limits

While the maximum contribution limits did not change this year, the 2012 Roth IRA contribution limits did change.

Below are the new limits determined by your tax filing status:

Married Filing Jointly

If you plan to file your taxes as “married filing jointly,” then you can contribute a maximum of:

• $5,000 if your income is $173,000 or less and you’re younger than age 50
• $6,000 if your income is $173,000 or less and you’re age 50 or older
• $0 if your income is $183,000 or more, regardless of your age

If you earn somewhere between $173,001 and $183,000, then your maximum contribution limit phases out to zero based on the IRS phase out rules.

Single, Head of Household, or Married Filing Separately

If you plan to file your taxes as “single, head of household, or married filing separately (assuming you didn’t live with your spouse at any time during the year),” then you can contribute a maximum of:

• $5,000 if your income is $110,000 or less and you’re younger than age 50
• $6,000 if your income is $110,000 or less and you’re age 50 or older
• $0 if your income is $125,000 or more, regardless of your age

If you earn somewhere between $110,001 and $125,000, then your maximum contribution limit phases out to zero based on the IRS phase out rules.

Married Filing Separately

If you plan to file your taxes as “married filing separately,” but you did live with your spouse at some point during the year, then you can contribute a maximum of:

• $5,000 if your income is $0 and you’re younger than age 50
• $6,000 if your income is $0 and you’re age 50 or older
• $0 if your income is $10,000 or more, regardless of your age

If you earn somewhere between $1 and $10,000, then your maximum contribution limit phases out to zero based on the IRS phase out rules.

Roth IRA Conversions

What about Roth IRA conversions?

The 2012 Roth IRA conversion rules are identical to the 2011 rules, meaning anyone can convert a 401k or a Traditional IRA to a Roth IRA regardless of income.

In years past, the IRS barred high income earners from making Roth IRA conversions. But in 2010, Congress allowed the $100,000 income limit on Roth IRA conversions to disappear. It may reappear sometime in the future, but as of now, it looks like 2012 will be another year without the conversion income limit. So if you’re a high income earner who’s never had the opportunity to make a Roth IRA contribution, take advantage!

Anyone, regardless of income, can make non-deductible Traditional IRA contributions, then convert those non-deductible Traditional IRA contributions to a Roth IRA tax free (since your original contributions have already been taxed). Effectively, it’s a back door method for high income earners to make Roth IRA contributions.

However, if you choose to go this route, beware of the pitfalls. Seek the advice of a financial professional who can guide you through the process – especially if you’ve made Traditional IRA contributions in the past. The IRS doesn’t allow you to segregate your non-deductible and deductible Traditional IRA contributions when making a conversion, so if you currently have a Traditional IRA, odds are that you’ll owe taxes on a conversion.

Summary

The 2012 Roth IRA rule changes from 2011 Roth IRA rules were relatively minor.

The maximum annual contribution limits remained unchanged at $5,000 and $6,000 respectively.

However, the annual income limits did change with the range for married couples moving from $169,000-$179,000 to $173,000-$183,000 while the range for singles changed from $107,000-$122,000 to $110,000-$125,000.

As of this writing, all other parameters remain the same year over year.