Changing from Roth IRA to Traditional IRA due to salary increase?

Question

I have been putting money into a Roth IRA account for a few years, but now my salary is completely over the annual limit that allows me to use a Roth IRA, so I must use a traditional IRA. Do I need to open a separate account for my traditional IRA? I have Ameritrade, if that matters.

Should I roll over any money from the Roth to the traditional? (I would think not because the Roth doesn't change taxes when I withdraw at retirement).

Anything else I should know?

Answer 1

This is what I would do:
1) I would keep the Roth IRA and just let it sit there. Even though you can't contribute to it, you can let it grow.
2) Open a Traditional IRA and contribute to that on a monthly basis. If you understand Dollar Cost Averaging, you would see why its better to invest once a month.
3) In 2010 or later, roll the Traditional IRA into your current Roth IRA and begin contributing to a Roth IRA. Congress has removed the income limit under the Pension Protection Act 2006. Under this act, you will be hit less hard on conversion taxes. Currently if you do a roll over from a Traditional to a Roth, you pay conversion taxes on gains and the deductible contributions. Under the Act, I believe you only have to pay 50% of it on April 15, 2011 and the other half in 2012.

Answer 2

I don't know if you can roll the Roth into a traditional IRA, but you don't have to and don't what to. You do need a separate account for your traditional IRA. There is actually no limit on the number of IRA accounts you can own. The annual contribution limit applies to your total contributions to all accounts, but can be divided amount as many accounts as you like.

zygote222 is mistaken about traditional to Roth conversions. You pay taxes on the entire amount for such transfers.

Answer 3

Yes, you need to open new Traditional IRA account if do not have one now or just use the existing Traditional IRA account. Then just transfer (rollover) that money from Roth IRA to this Traditional IRA for SAME YEAR!

Normally you have two choices in your case:

1. Either rollover money to Traditional IRA for same year
OR
2. Withdraw money from Roth IRA before the due date of income tax return for that year.

In other words, you can treat your case as excess contribution
to Roth IRA.

Also note that you have to any of this action before the due date of income tax return to avoid penalty.

Read here for info:
http://www.theusefulinfo.com/finance/2007/04/what-if-you-contribute-too-much-or.html

And just to add bonus info, you may be able to convert this
money from Traditional IRA to Roth IRA in 2010! How? Then read this:
http://www.theusefulinfo.com/finance/2007/04/not-eligible-for-roth-ira-high-income.html

-Infoman
Not a legal advice.

Answer 4

You should keep the Roth where it is. You don't have to change it to a traditional just because your income is now over the limit. You just can't contribute to it anymore. You should just open a traditional IRA in addition to your Roth.

Answer 5

You can certainly expect to need separate accounts for the Roth and traditional IRAs. They have completely different tax consequences, so you wouldn't want to mix them together in any case.

Perhaps you know this already, but starting in 2010, the income limits for converting a traditional IRA to a Roth IRA are completely eliminated. That means that, if you choose to do so, you can use the traditional IRA as a temporary holding location for what will become additional Roth IRA contributions. Simply open a traditional IRA and make contributions for 2007, 2008 and 2009. Then in 2010 you can make the traditional-to-Roth conversion and owe taxes only on any appreciation in value, not on your original contributions. Pretty slick.

Amendment: Sorry, Steven F, but you are the one who is mistaken about Roth IRA conversion rules. Take, for example, a conversion done in 2006. The entire amount of the conversion is reported on line 15a of form 1040, and the taxable portion of the conversion amount is reported on line 15b. To figure out the taxable portion it is necessary to fill out form 8606. The calculations on that form include subtracting out all nondeductible contributions. Since Shasta's income is too high for him/her to make deductible IRA contributions, ALL of the contributions are nondeductible. I've done the tax forms for my own Roth conversion, and that's how it is. As I said before, pretty slick.

Answer 6

Traditional IRA: pre-tax cash invested. You pay taxes while you withdraw. Roth IRA: taxed cash invested. No taxes while you withdraw, adding gains on preliminary funding.