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What’s New for Roth IRA in 2011?
Many are finding it difficult to research about the 2011 Roth IRA contribution limits. Actually, changes that took place for the Roth are the increased limits of the Modified AGI (Adjusted Gross Income) and not the contribution per se. The screenshot image on your left shows the changes in Modified AGI maximum income limits. Kindly click on it to get a larger view.
In order to know your 2011 Roth IRA contribution limits, you have to workout your Modified AGI against the new Maximum (AGI) to determine if you still qualify in adding more contributions to your Roth IRA during the year.
If you are, you can determine your contribution limit based on the spread between the new IRS Modified AGI and your own Modified AGI. This may all sound confusing and technical; hence, we deemed it best to make it simple for you. We’ll take it nice and slow from here and this article will walk you through the whole process of determining your current Roth IRA contribution. .
It's actually a two-step process, wherein the first concerns your Modified AGI, while the second deals with the caculations for your allowable contribution limit.
Now to make things even easier for you, we have provided you with a template to serve as your Roth IRA worksheet, as it features pre-formatted calculations for the two steps. The link to the template is found in the last section of this article.
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Determining the Modified Adjusted Gross Income (MAGI)
In calculating your MAGI, you have to get hold of your 2010 form 1040, from where you will extract the figures to calculate your 2011 MAGI.
Fill in the template with the applicable amounts. Keep it in mind that yields on Roth IRA investments are tax-free, hence, they do not form part of your Adjusted Gross Income.
On the other hand, tax deductible benefits are added-back to modify your AGI, since they technically form part of your gross income for the year, albeit allowed as tax-deferred or tax-free benefits.
For purposes of illustration, the template contains cell values, which you can modify for your own purpose. Use the formula bar when inputting your own data to avoid accidentally deleting cells that have automatic functions.
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Determining the 2011 Roth IRA Contribution Limits
Knowing how to determine the correct contribution limits of Roth IRA investments is quite important, inasmuch as excess contributions are subject to a 6% excise tax. Understand that the higher the income earned by an individual, the higher the limitations to his or her contributions to the investment account.
Although Roth IRA contributions are immediately taxed as part of the employee’s gross salaries, any income earned by the investment is tax free. Hence, getting more funds invested under this investment tool, equates to more opportunities for the Roth IRA owner to amass tax-free funds. That is, if there are no contribution limits --- but since there are, non-observance of the contribution restrictions denotes abusive use of the investment benefit.
Step 1 - Determine the amount of investment phase out, which is calculated by extracting the difference between the maximum and minimum modified AGI.
Kindly view an enlarged image of our template and notice that the cells have drop down menus which users can simply click on.
The new MAGI: $ 179,000 for married and jointly filing, $ 122,000 for single, and $ 10,000 for married/filing separately but living with spouse. The same holds true for the minimum MAGI: $ 169,000 for married and jointly filing, $ 107,000 for single, and $ 0.0 for married/filing separately but living with spouse.
Our example is for a married couple filing jointly = $ 179,000 - $ 169,000 = = $ 10,000 (See Column I for the Value of investment phaseout.
Image Credit:Screenshot images were created for this article by the author.
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Step 2 - Determine the contribution phaseout / limit, which is calculated by extracting the difference between the maximum MAGI and your MAGI, as previously computed. Using our example, the Roth owner's modified AGI is $ 175,000 and its difference against the maximum AGI of $ 179,000 is $ 4,000.
Step 3. Get the percentage of the contribution phaseout ($ 4,000) over the investment phaseout ( $ 10,000) or $4,000/$10.000 and you will get the value of 0.40 or 40%.
Step 4 - Multiply the resulting percentage to the maximum amount of contributions, which could either be $ 5,000 or $ 6,000 for those 50 years and older. The $ 2,000 amount derived is the amount of contribution reduction for the year. This being the quantitative equivalent of the phased out portion of the contribution.
Step 5 - Determine your 2011 Roth IRA Contribution Limit:
Maximum Allowable Contribution = $ 5,000
Less: Phased-out Contribution for the Year = $ 2,000
Less: Contributions for Traditional IRAs = $ 500
New Roth IRA Contribution Limit = $ 2.500
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Free, Downloadable Template for Roth IRA Contribution Limit
Find the Roth IRA Worksheet we prepared at Bright Hub's Media Gallery , in order to make easier the process of determining the new contribution limit for the year. The template provides the constant values in a drop down menu, and the user can simply click on the appropriate amount.
Each taxpayer type is provided with a set of formatted cells; hence, users need only to input their own data. As each required cell is filled, Column I -for Values, automatically generates the answers. That way, Roth IRA owners and others who have been interested in this type of investment incentive, can easily determine the 2011 Roth IRA contribution limits.
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- Publications 590 for Roth IRA lifted from http://www.irs.gov/publications/p590/ch02.html#en_US_2010_publink1000231012