Roth IRA - catch up contributions?

[zinjanthropus]

Is it possible to make catch up contributions in a Roth?

For example, these next three years I plan to contribute to my Roth but not max out my contribution as I am also contributing to a 403(b). I understand the arguments for and against whether that itself is a good idea and not the issue I'm asking about here. Instead, I would like to know if, during my last maximum income year of eligible Roth IRA contributions whether it's possible to contribute not just that year's max (e.g. $5,000) but any difference in my past investment amounts in previous years and the max amounts for those years.

Is that allowed?

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[The White Coat Investor]

Is it possible to make catch up contributions in a Roth?

For example, these next three years I plan to contribute to my Roth but not max out my contribution as I am also contributing to a 403(b). I understand the arguments for and against whether that itself is a good idea and not the issue I'm asking about here. Instead, I would like to know if, during my last maximum income year of eligible Roth IRA contributions whether it's possible to contribute not just that year's max (e.g. $5,000) but any difference in my past investment amounts in previous years and the max amounts for those years.

Is that allowed?

No, it isn't allowed. Do all you can to max out your Roth IRA now as most attendings will make too much to contribute to one ever again. There is such a thing as "catch-up" contributions but it just means someone over 50 can put an extra $1K in there each year.

Contribute to the 403b up to the match, then max out the Roth, then go back to investing in the 403b.

Remember you can even put an emergency fund in the Roth as contributions can be withdrawn at any time for any reason with no penalty or taxes. Just max it out, you'll be glad you did.

 

[zinjanthropus]

No, it isn't allowed. Do all you can to max out your Roth IRA now as most attendings will make too much to contribute to one ever again. There is such a thing as "catch-up" contributions but it just means someone over 50 can put an extra $1K in there each year.

Contribute to the 403b up to the match, then max out the Roth, then go back to investing in the 403b.

Remember you can even put an emergency fund in the Roth as contributions can be withdrawn at any time for any reason with no penalty or taxes. Just max it out, you'll be glad you did.

thanks - that was the problem - I had heard the term "catch up contributions" on a few occasions and not understood what it in the correct context..

now, I will say this - my wife and I aren't planning to max out our roths completely next year because 403b contributions at a higher level can bump us from 25% to 15% tax bracket.....is this sensible?

 

[lord_jeebus]

thanks - that was the problem - I had heard the term "catch up contributions" on a few occasions and not understood what it in the correct context..

now, I will say this - my wife and I aren't planning to max out our roths completely next year because 403b contributions at a higher level can bump us from 25% to 15% tax bracket.....is this sensible?

The change in tax bracket only applies to the money earned over the cutoff, so your overall tax rate will still be close to 15%. If your 403b has no matching, maxing out the Roth is still likely the better option.

 

[The White Coat Investor]

thanks - that was the problem - I had heard the term "catch up contributions" on a few occasions and not understood what it in the correct context..

now, I will say this - my wife and I aren't planning to max out our roths completely next year because 403b contributions at a higher level can bump us from 25% to 15% tax bracket.....is this sensible?

Jeebus is right on. You misunderstand how the tax system works. Do some reading on marginal tax rate until you understand that you never get bumped from one bracket to another. You pay at a certain rate on some of your income and at a certain rate on another portion of your income.

Not maxing out your Roths as a resident is just about the dumbest thing you can do. I even took out a 0% CC loan one year during residency to make sure I maxed out the account. Once your combined income is over $160K, you won't have access to a Roth again. Also, your tax rates are relatively low these days compared to what they will be the rest of your career and likely during retirement. The Roth option is better than one which gives you a tax break now, especially if the 2003 tax cuts get repealed like Sen. Obama wants.

 

[AndyFromMDTAXES]

Once your combined income is over $160K, you won't have access to a Roth again.

Great advice throughout this thread. There is an opportunity starting in 2010 that basically allows everyone to contribute to a Roth IRA each year. Starting in 2010, the income limitation to convert your IRA to a Roth IRA disappears. Currently, you can only convert money to a Roth IRA if your AGI is less than $100k.

This limitation is in addition to one that prohibits "high-income" taxpayers from contributing to a Roth IRA each year. For 2008, the phase-out to contribute to a Roth is $101k-116k if single and $159k-169k if married.

So what am I getting at here???? People whose income exceeds the thresholds listed above can basically contribute to a Roth by making a non-deductible IRA contribution each year that their income exceeds the allowable threshold, and then converting their IRA to a Roth IRA in 2010. Assuming you have no other IRA money, you will only be taxed on the appreciation within your IRA account up to the time you convert it to a Roth in 2010. (The more IRA money you have, the less attractive this strategy.)

The big question is what will happen after 2010. Currently, most of the tax rules are set to sunset back to the pre-2001 rules after 2010. Even so, by making non-deductible contributions to an IRA between now and 2010, and then converting that money to a Roth in 2010, is a potentially tax-efficient way of getting more money into a Roth.

(I wrote an article about this strategy available at www.mdtaxes.com/news0307.html)

 

[martinjole]

Hey
Welcome in this forum. Hope you will enjoy discussion and you will give good suggestions to other people also.

 

[leorl]

So this is a dumb question - can you still contribute to a 403b AND max out a Roth IRA in the same year without exceeding the limit of a Roth IRA? I'm in my first year of a 3 year residency and wondering if it is worthwhile to try to open and max out a Roth IRA before april 15th

 

[schwab]

So this is a dumb question - can you still contribute to a 403b AND max out a Roth IRA in the same year without exceeding the limit of a Roth IRA? I'm in my first year of a 3 year residency and wondering if it is worthwhile to try to open and max out a Roth IRA before april 15th

Not a dumb question at all. They are considered two totally separate account types and each have their own maximum contributions. For 2008, those limits were:

Roth IRA - $5000
401(k) / 403(b) - $15,500

So the answer to your question is YES - you can max out the Roth and still have contributed to your 403(b). Also, it is definitely worthwhile to open and max out the Roth. It's a great benefit to take advantage of while your taxes are so low (pretty much 0% for 2008 after you claim the lifetime learning credit!).

There is some wonkiness if you talk about contributing to both a Traditional IRA and a 403(b), but just ignore that and stick with your 403(b)

 

[|2idicu|ous]

Not maxing out your Roths as a resident is just about the dumbest thing you can do. I even took out a 0% CC loan one year during residency to make sure I maxed out the account.

what is and where do you get the "0% CC loan"?

 

[tinkerbelle]

For those of you that have >150k in loans at 6.8%, are you still maxing out a Roth IRA while in residency? I know it's an awesome time to invest in the market right now, but it seems like a better idea to pay down the principle on my loans.

 

[The White Coat Investor]

what is and where do you get the "0% CC loan"?

You know the whole credit bubble? That was going on while I was in residency. I think I had a card I hadn't put anything on in several years and they sent me an offer for 1.9% forever on my card. Inflation at the time was 3% so I think I mostly used that. But for the last couple of years I get an offer once a year for 15 months of 0% interest. Since I have a high income, I can usually just put two or three months spending on there and let it sit for a year before paying it off. Doesn't cost me anything as long as I have cash in the bank I can cover it with should something weird happen.

 

[lord_jeebus]

For those of you that have >150k in loans at 6.8%, are you still maxing out a Roth IRA while in residency? I know it's an awesome time to invest in the market right now, but it seems like a better idea to pay down the principle on my loans.

Yes, not because I expect to beat 6.8% over the next decade (although I do so far with the aggressive shorting tactics I have been successfully employing with my Roth funds), but because of the tax advantages of the Roth combined with my current near-zero federal income tax.

I also use the Roth as a bit of an insurance policy against economic downturn (because I short almost everything) - if times improve, I'll make a good salary after residency and the investments won't matter much; if we enter a second Great Depression I'll have a hefty Roth to fall back on.

 

[IllinoisStudent]

Yes, not because I expect to beat 6.8% over the next decade (although I do so far with the aggressive shorting tactics I have been successfully employing with my Roth funds), but because of the tax advantages of the Roth combined with my current near-zero federal income tax.

I also use the Roth as a bit of an insurance policy against economic downturn (because I short almost everything) - if times improve, I'll make a good salary after residency and the investments won't matter much; if we enter a second Great Depression I'll have a hefty Roth to fall back on.

I am not sure what tax benefits are you referring to..my understanding is that you pay taxes on money put in Roth IRA. For a resident/medical student, I don't see any point in putting money in IRA unless you are trying to save up for a house. Otherwise, my understanding is that you end up getting taxed twice (Double taxation).

 

[lord_jeebus]

I am not sure what tax benefits are you referring to..my understanding is that you pay taxes on money put in Roth IRA. For a resident/medical student, I don't see any point in putting money in IRA unless you are trying to save up for a house. Otherwise, my understanding is that you end up getting taxed twice (Double taxation).

The huge tax advantage is you don't pay taxes when you take money out - both on the principal and the decades of capital gains. So if you are in a low tax bracket now...you never really pay tax at all.

 

[schwab]

The huge tax advantage is you don't pay taxes when you take money out - both on the principal and the decades of capital gains. So if you are in a low tax bracket now...you never really pay tax at all.

Exactly - Especially your first (half) year of residency when you likely won't have to pay any taxes at all due to your education deductions and half-year salary.

What this means is you put in tax free money, let it grow over 30-40 years, then take it out when you retire and pay no tax on it then, either. In normal taxable accounts, you'd have to pay taxes on your investment gains. In 401(k)/403(b) accounts, you don't pay taxes today (which are probably zero/low anyway), but you have to pay taxes when you withdrawal the funds from the account.

It's a free lunch from the government and it's your duty to take advantage of it

 

[tinkerbelle]

Exactly - Especially your first (half) year of residency when you likely won't have to pay any taxes at all due to your education deductions and half-year salary.

What this means is you put in tax free money, let it grow over 30-40 years, then take it out when you retire and pay no tax on it then, either.

But you can't be sure that the government won't change the tax rules and make docs pay taxes on the Roth. I still think it's better to pay down my student loans... especially since I don't short sell or do anything else that would increase my rate of return.

 

[deleted116380]

I called up the IRS a couple days ago and asked if I could max out a traditional IRA for the 2008 year ($5,000). Since I am part of an employer-sponsored program (Federal gov't Thrift Savings Plan), I needed to have my AGI under $53,000 last year to qualify. Since I did, I'm making an account now for 2008 and I'll be able to fill out a 1040X (already filed my taxes and got my refund in Feb) and get back $750 (15%).

My plan is to max out my contributions this year to my regular retirement account through work and then after I leave work for school in Sept, I'll put it all in a Rollover IRA. Then I have three years in med school to pull out that money without the 10% early withdrawal fee (using it toward "higher education"). Since the money will be spread over three tax years, it will be less than my personal exemption and std deductions each year. Tax free! Hopefully I can make some money on the investment as well. I rather burn through my retirement savings through med school rather than take out loans at 6.8% and hold onto my small savings until I'm 60.

 

[Speed Racer]

SO I'm looking at buying a house and I know you can withdraw up to 10 grand from the Roth for a house purchase. My question is can you put it back in at a later date. ie can you contribute more than the 5grand the next year limit to make up for what you took out?

 

[Sol Rosenberg]

SO I'm looking at buying a house and I know you can withdraw up to 10 grand from the Roth for a house purchase. My question is can you put it back in at a later date. ie can you contribute more than the 5grand the next year limit to make up for what you took out?

If you are over 50. Otherwise, No.