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IRA Mysteries Revealed Portfolio Matters | Christine Benz

making deductible contributions when those deduc- tions were most beneficial. If their tax brackets go up, they’ll be happy they made Roth contributions and can take tax-free withdrawals in retirement, thereby skirting taxes at a higher level. (As a side note, the same logic applies to the idea of splitting Roth and traditional contributions to a 401 (k). If you have no idea what your tax bracket will be in retirement, why not make both types of contributions?) By contrast, individuals whose only choice is to make contributions to a traditional nondeductible IRA and a Roth (either directly or through the back door) will benefit less from splitting their contributions. They’re not receiving a tax break on their nondeductible con- tribution; instead, they’re only getting tax-deferred compounding, which the Roth offers, too. (So does a good tax-efficient mutual fund, for that matter.) But the Roth also offers tax-free withdrawals and doesn’t necessitate required minimum distributions, making a Roth contribution much more preferable to investing in a nondeductible IRA and leaving it there. I often see the income limits on IRA contributions expressed as a range—for example, $178,000 to $188,000 for married couples for Roth IRAs. What does it mean if my income falls between those two amounts? What you’re referring to is what tax geeks call the “phase-out range.” If you’re part of a married couple filing jointly and your modified adjusted gross income falls below $ 178 , 000 , you can make a full contribu- tion to a Roth; if it’s above $ 188 , 000 , you can’t make a direct contribution at all, but you can get in through the back door. If it’s between $ 178 , 000 and $ 188 , 000 , you’re in the phase-out range and can make a partial contribution. Traditional IRA s have phase-out ranges, too—$ 59 , 000 to $ 69 , 000 for single filers and $ 95 , 000 to $ 115 , 000 for married couples filing jointly. The amount of your allowable contribution is deter- mined by looking at how much you’re over the low end of the phase-out range, then dividing that number by the total phase-out range. For example, say a 45 -year-old married person has a modified adjusted gross income of $ 180 , 000 . Her income is $ 2 , 000 over

For a savings vehicle that only allows you to make a contribution of a little more than $ 5 , 000 a year, IRA s are certainly governed by a lot of Byzantine rules. There are Roth and traditional IRA s, deductible and nondeductible, each governed by its own pecu- liar rules regarding contributions, income limits, and withdrawals. And don’t even get me started on rollovers, conver- sions, and recharacterizations. If you were to do a web search of “ IRS Publication,” it’s no wonder that “ IRS Publication 590 ”—the one that lays out the rules on IRA s—jumps to the top of the list of sug- gested search terms. But if you play your cards right—or roll over a good chunk of change from an employer plan—an IRA can be a key component of your retirement portfolio. Given that fact, plus the many complexities involved with the IRA wrapper, it’s probably no wonder that so many people have questions about their IRA s. Here are a few: Yes, you can, but the total contribution to Roth and traditional IRA s must not exceed the limits—in 2013 , that’s $ 5 , 500 for people under age 50 and $ 6 , 500 for people over 50 . Splitting contributions between Roth and traditional IRA s will tend to make the most sense for people who are eligible to make both a traditional deductible IRA contribution and a Roth contribution and aren’t sure whether their tax rates will be higher or lower in retirement than they are today. Dividing contributions between both account types allows savers to hedge: If their tax brackets end up being lower in the future, they’ll be glad they took the tax break up front by Can you contribute to both a Roth IRA and a nonde- ductible IRA in the same year?

Welcome to our new feature, Portfolio Matters, by Christine Benz, Morningstar’s director of personal finance. We’re thrilled to have Christine help you manage the port- folio challenges that you face each month.Christine will address personal finance issues with prac- tical solutions through- out the year.