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Amounts and timing of Traditional IRA contributions.
This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.
Many taxpayers earn income above federally imposed thresholds and cannot make contributory Roth IRA contributions. (See our table on the “Roth IRA Eligibility” page.) Therefore, the only way that a Roth IRA is possible for these folks is by converting a traditional IRA. Accumulating assets in an IRA positions you to potentially convert your Lord Abbett IRA account to a Roth IRA. (See "Roth Conversion Resource Center.") This means exchanging the traditional IRA for a Roth IRA and paying taxes on all pretax dollars converted.
However, please understand that the rules do not allow you to convert nondeductible dollars only. What's taxable and what's not is based on a formula (unless it's a full conversion) that multiplies the dollars converted by the non-deductible dollars over the value of all IRAs, including the amount converted, at the end of the year in which the conversion occurs.
Here's an example:
Aftertax dollars in all non-Roth IRA accounts, including rollovers, SEPs,3 and SIMPLE IRAs,4 is $10,000, and the amount of a Roth IRA conversion equals $10,000.The value, including the converted amount, of all IRAs at the end of the year in which the Roth conversion occurs equals $100,000.
$10,000 (the amount converted) multiplied by ($10,000, aftertax dollars, ÷$100,000, the value of the traditional IRA at year-end, including converted amount) = $1,000. This is the nontaxable portion, and $9,000 is subject to taxation without penalty.
You now would have a Roth IRA account equaling $10,000, which, when withdrawn after age 59½ and five years of existence, will render all dollars, including earnings, income tax-free in that Roth account.
1 Income whose taxes can be postponed until a later date; examples include IRAs and 401(k) plan earnings.
2 An investment, such as an Individual Retirement Account (IRA), whose earnings are either tax-deferred or tax-exempt.
3 A Simplified Employee Pension Plan, commonly known as a SEP-IRA, is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP-IRA plan for your business, you and any eligible employees establish your own separate SEP-IRA; employer contributions are then made into each eligible employee's SEP-IRA.
4 A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or non-elective contributions. All contributions are made directly to a SIMPLE Individual Retirement Account.
Lord Abbett will waive (or otherwise pay) the yearly $10.00 custodial fee that would be charged each year on an ongoing basis to every new IRA account and, therefore, will not assess a custodial account fee effective in 2013 or any year afterward. Fund level fees and expenses are still applicable. Please see the current prospectus.