Stupid IRS Rule on Roth IRA for married people
 

Ok, I recently learned that if you have a Roth IRA and file your taxes as "Married, Filing Separately" there's a penalty of $360.

We've filed this way since I've had a business for tax savings. 2008 was my first year with a Roth IRA. I think it's a crock. I had to reclassify my Roth as an investment account. This is a little known rule from what my accountant tells me.

I just wanted to vent about it. :rolleyes:

You could have simply put "stupid IRS rule" and everyone could pick one of their favs! There are so many of them....

Hubby says:

Roth IRA contributions (unlike other regular IRAs) are NOT tax deductible. So if you put money into yours then you have to pay tax on that contribution (it does not reduce your income, hence your tax obligation). Roth earnings however are TAX FREE when take them out. example... if you made $50,000 for the year and contributed $5000 to a Roth, you'd pay tax on $50,000.

Other IRAs, you reduce your income by the amount of any contributions, and therefore pay less tax for that year.
Other IRAs, are taxable when you take them out. Example...
If you made $50,000 and contributed $5,000 to a regular IRA, you will pay tax on $45,000. (hence less tax).

He is unsure as to whether married filing separately affects this more or not.

But the bottom line is that comparing a Roth to another IRA type is that you end up paying more taxes if you have the Roth for this year. Hubby says this is not a "penalty" as the IRS defines that word. A penalty is when you violate a rule.
But it feels like a "penalty" in that you have to pay more.

IMHO Deciding between a Roth and other IRA depends on what you need. If you need a deduction NOW and think your tax bracket when retired will be lower than now significantly (when you have to pay tax on your IRA contribution gains), regular IRA seems the way to go) For me and my situation, paying tax now on contribution amount of $5,000.00 (I'm 53, I think it's my limit) than later on hopefully the huge amount gained by my Roth. Hopefully market won't fall terribly and hurt so many trying to retire, like now. It's a carpshoot, the market is. For some, the security and consistency of CD's might be the way to go, for others the potential of gains in Market (Or losses maybe) are way to go. Depends on your understanding and tolerence for risk. DH has 501K which is using pre-tax contributions. I fear taxes will have to be paid later in retirement so we better be aware not to rely on getting whole amount.

I am not an accountant, this just what I think!! (based on what I think accountant and that guy at the Morgan-Stanley or Charles Schwab or ? say. I see scrimping in my retirement future anyway.

If you file married filing separately and you live with your spouse you can't contribute to a Roth IRA if your AGI exceed $10,000. So it's deemed an excess contribution.

I should have asked the accountant before opening the Roth account, but who would have guessed about this one? :confused:

The reason I opened it is because we switched our work plan from a SIMPLE IRA (in 2007) to a SEP IRA for 2008. I wasn't putting as much in it since the company was only contributing a certain percentage. With the SIMPLE plan I could maximize my salary deduction and put more away for retirement.

Ask your accountant - how about a 401K, as an employee you can contribute how much? As the employer how much? DH's company does this, can't imagine them doing it if it's not tax deductible. But that's OMHO.