7 Things You MUST Know About Roth IRA Rules for 2011

When you’re at the point in your life where you are adding to your Roth IRA in order to help plan for a stable and enjoyable retirement, it makes sense to have all of the current information regarding the current IRS regulations concerning the Roth. Plus, you want to have a grasp of the current IRA rules for a given year. At this point, people are looking forward to 2011.

In some cases, you might have taken the maximum contribution amount into your Roth for 2010 and you’re thinking about saving for next year’s contribution. Perhaps, you’ve got your eye on the tax season. No matter what, you want to know enough before you start making decisions about your IRA.

As has been expected are some differences in the rules from the previous year. The IRS has revealed it current Roth IRA rules. This data was based on a variety of factors and figures including inflation statistics to come up with new limits for the contributions.

1 Contribution Limits Have Remained the Same….Again

Standard Roth IRA contribution limits are still at $5,000. Those plan participants over 50 years of age have a limit of $6,000, referred to as the “catch up contribution”.

Contribution Year49 and Under50 and Over (Catch Up)
2009$5,000$6,000
2010$5,000$6,000
2011$5,000$6,000
2012$5,000$6,000
2013$5,500$6,500
2014$5.500$6,500

2 Roth IRA Phaseout Limits Have Increased

There are some other details released in the 2011 Roth IRA rules. For instance, the AGI phase-out range for tax payers making contributions to their Roths is between $169,000 and $179,000 for jointly filing couples, a $2,000 increase from 2010. The same increase is true for singles filing. The range is $107,000 to $122,000. Married individual who file separately and have been actively participating in an employer-sponsored retirement plan should see no changes in the phase-out range. It stayed the same as the previous year: $0 to $10,000.

3 Direct 401k Rollovers Into Roth IRA’s is S-I-M-P-L-E

Another rule that remained the same but still offers more opportunity than was available prior to 2010 concerns direct rollovers for 401(k) to a Roth IRA. The process used to require you to open a traditional IRA account, then rollover your 401(k) into it, and end by opening a Roth account and converting the traditional IRA into a Roth. In 2010, this changed by skipping a step, letting you convert it directly from the 401(k) to a Roth IRA. It’s less of pain and there is certainly less unnecessary paperwork.

4 Roth IRA Conversions Continue

In 2011, the rules are the same as 2010. except that there is no two year deferral option to report the income. Whatever is converted in 2011 must be reported in 2011, along with any amounts that must be reported as half of a 2010 conversion. The income limits disappeared permanently after 2009.

Want more information on the Roth IRA Conversion? You can see more on the conversion tax rules regarding after tax contributions.

5 “Take Back” Still in Effect (IRA Recharacterization)

Roth IRA Rules and Limits for 2011
Creative Commons License photo credit: indy_slug

If you initiate a Roth IRA conversion and then decide it wasn’t the best idea, you’re in luck. You’re allowed a “take back” in the form of a recharacterization. The recharacterization deadline is 10/15 of the following year. If you did the Roth IRA conversion in 2010, you would 10/15/2011.

Note: In 2011 the 15th falls on a Saturday, you would be wise to have it done before then.

6 *NEW RULE* Roth Conversions from Your Existing 401k

Say what? Yes, this was news to me. This was released this past September in the Small Business Tax bill.

First things first, if you are still working, are at 59.5 in age, and your plan allows it, you can do what’s called an in-service distribution with your 401k into a IRA. Once you reach the IRA, you then, of course, can do the conversion. What you might not know is that some plans allow you to take out certain “parts” of your 401k balance.

The key here is “parts“. You still aren’t able to distribute your entire 401k balance to then do a conversion. Where the rules change a bit is regarding the employer profit sharing and employer contributions. These two type of contributions are available for the in-service distribution provided they meet this criteria:

  • The money has been in there for at least 2 years.
  • You, the employee, has been in the plan for at least 5 years; or you’ve reached an age that has been satisfied according to your plan documents.

Please note: if you have rolled over an IRA or old 401k into your current 401k or you have contributed after-tax contributions, those will be allowed for an in-service distribution. This is providing the plan document allows it.

7 Can’t Convert to Roth IRA…What About Roth 401k?

If don’t qualify for the in-service distribution, don’t give up quite yet. The IRS just recently released guidance about the possibility to convert your 401k to a Roth 401k. This is new but has already taken effect and will be available in 2011. One requirement for you to be able to do this is that you must have a Roth 401k option with your current plan.

No Roth 401k option = no conversion.

Another important consideration: Unlike the Roth IRA conversion, there is NOT an option to recharacterize with a conversion to a Roth 401k.

The key to all this is dependent on your 401k plan – they are all different. The best thing to do is to check with your HR department to see if any of these options are available. Here’s another piece of advice, if your employer doesn’t offer it – stay on them. A little bit of pressure and persistence never hurts.

Benefits people wanted this option to allow plans to retain assets that otherwise would be distributed out of the plans for Roth IRA conversions. Here is the IRS release on these conversions: http://www.irs.gov/pub/irs-drop/n-10-84.pdf.

Does it Apply to 403b’s?

If you’ll look into the IRS publication, you will see that the in-service Roth IRA conversions can also apply to 403b’s. Once again: double check with your plan administrator. Notice a theme here?

Sources:

  • Treas. Reg. § 1.401-1(b) (1)(ii) and Revenue Rulings 71-295 and 68-24
  • http://www.irs.gov/pub/irs-drop/n-10-84.pdf

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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Comments | 4 Responses

  1. Mary says

    Excellent article. I’ve been researching all of this information heavily, as I was divorced last year and am in the process of rolling over both a 401K and a Roth. The laws and reg’s are a bit confusing, and this cleared up some things regarding what options I do and don’t have. Thank you!

  2. Leslie says

    I think you helped. I will know on Mon. when I call Morgan Stanley and attempt to convert my Roth back to a traditional IRA. I mistakedly transferred to a Roth last yr. and it really created problems as I am on disability status as of June ’10 and pd. no tax, although I do have mortgage expense and 17 yr. old daughter. My tax bill was through the roof. I hope I read accurately, I can reconvert back to traditional and I am ok again. Thank you for giving me hope. Sincerely, Leslie R

  3. Charlotte74 says

    This kind of information is especially important in these difficult economic times. People need to plan and have the best information available to them.

  4. Sophia.C. says

    This year is the perfect time to get serious about funding your retirement. Contributions to a Roth IRA are not tax-deductible. I have to pay tax upfront on the money contribute to a Roth IRA now.

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