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 2013.
In some cases, you might have taken the maximum contribution amount into your Roth for 2012 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. Here’s a look at the Roth IRA rules for 2013.
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 Finally Increased
Standard Roth IRA contribution limits have increased by $500 to $5,500. Those plan participants over 50 years of age have a limit of $6,500, referred to as the “catch up contribution”.
|Contribution Year||49 and Under||50 and Over (Catch Up)|
2 Roth IRA Phaseout Limits Have Increased
There are some other details released in the 2012 Roth IRA rules.
For instance, the AGI phase-out range for tax payers making contributions to their Roth’s is between $178,000 and $188,000 for jointly filing couples, a $5,000 increase from 2012.
The same increase is true for singles filing. The range is $112,000 to $127,000. 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.
Learn about all the rules of rolling over your 401k into a Roth IRA.
4 Roth IRA Conversions Continue
In 2013, the rules are the same as 2010. except that there is no two year deferral option to report the income. Whatever is converted in 2013 must be reported in 2013, 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)
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 2012, you would have until 10/15/2013.
6 *NEWER RULE* Roth Conversions from Your Existing 401k
This was released last 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:
1. The money has been in there for at least 2 years. 2. 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. 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?
Best Roth IRA Account Options
There are many brokerage firm options for you to open a Roth IRA with, but which one is best?
Each broker is going to have different strengths depending on your investing experience and goals.
It all depends on your situation.
We maintain two Roth IRA resources for readers:
- a list of the best places to open Roth IRA will walk you through the best account opening options
- a list of the best online stock broker sign up bonuses shows you which brokerage firm offers the best bonus for your account size
TD Ameritrade makes the process of opening and funding your Roth IRA very easy.
The online process will take you about 15 minutes from start to finish.
Plus you can get a nice sign up bonus if you open the account with a significant amount of money. Free money for your Roth IRA means you will reach retirement even faster.
Scottrade is one of our favorite brokers thanks to their low trading costs, excellent online interface, and 500+ branch locations across the country that you can walk into for help.
Even though Scottrade doesn’t offer a sign up bonus for opening a Roth IRA, we still love this brokerage firm. (And if you are just starting out investing you probably don’t have $10,000 to $25,000 needed to get really big brokerage sign up bonuses.)
For those just starting out and trying to build up a great investing habit, ShareBuilder is one of the best brokerage firms to go with.
Your trades are rock bottom priced at just $4 when you do automatic investing.
That automatic investing will, over time, help you build a large portfolio. You don’t have to have all of the money to invest today as long as you can commit to building up your funds over time.
ShareBuilder helps you do just that. The interface is simple, and if you can get a $100 bonus for signing up.
Don’t read a bunch of information and put off opening a Roth IRA. Your retirement can’t wait. Get started today and choose one of the above accounts to open your first Roth IRA. Not sure which account you want? Check out the best places to open Roth IRA and the best online stock broker sign up bonuses.
- Treas. Reg. § 1.401-1(b) (1)(ii) and Revenue Rulings 71-295 and 68-24
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.