Dear Dr. Don,
What if, after the first year of contributing to a Roth IRA, I can no longer contribute? Can I leave my money in the Roth IRA without ever again contributing to the account? Will there be any penalties? A fee?
-- Candace Cache
Dear Candace,
There's no obligation to continue to fund the account in future years. It can be a "one and done" funding for one tax year.
Even within a tax year you can split the funding among accounts, as long as you don't over-contribute.
There would be no reason for a penalty, but you're right to be concerned about annual fees and account expenses. Keeping an eye on fees and expenses is critical if you plan to have just one year's funding in the account.
Keep in mind that the account balance is portable if you decide you want to move the account to another custodian. IRS Publication 590, Individual Retirement Account Arrangements, says: "You can withdraw, tax-free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA."
Some people worry that they cannot continue to contribute to a Roth IRA because their income has become too great. However, the income limits for contributing to a Roth IRA are scheduled to be eliminated in 2010.
So, you only have a short window for being ineligible to contribute to a Roth IRA based on your modified adjusted gross income in the 2008 and 2009 tax years.
A way to finesse the issue in 2008 and 2009 is to fund a traditional IRA with after-tax dollars in 2008 and 2009 and then recharacterize those accounts in 2010. You should consult with a professional tax adviser before taking this approach so she can review your Roth and traditional IRA accounts and help you decide if this is the right approach for you.
Bankrate's article, "Does nondeductible IRA make sense?" by tax columnist George Saenz, discusses this option.
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