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High Earners Can Still Get Into a Roth IRA

Jan. 30, 2015
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By Mike Eklund

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Did you know that you can access a Roth IRA regardless of your income? The IRS says that if your modified AGI is greater than $193,000 when married filed jointly, or $131,000 for single filers, you cannot make a Roth IRA contribution. So most people above the income limits assume that their only option is a non-deductible IRA. But what they don’t realize is that Roth IRA conversions are not limited by income level.

No required distributions

As a reminder, the Roth IRA contribution limit for 2015 is $5,500, with an additional $1,000 if you are over 50. The benefits of a Roth IRA are that your earnings grow tax-free and that there are no required distributions when you reach age 70 1/2, unlike with other IRA accounts. In addition, a Roth IRA can make a wonderful inheritance, giving your beneficiaries years of tax-free income using a strategy known as the “stretch IRA.”

High income? No worries

If your income exceeds the modified AGI limits mentioned above, you do have another option, commonly called a “Backdoor Roth IRA.” A simplified version of the process is as follows:

  • First, make a nondeductible contribution to a traditional IRA.
  • Second, convert the traditional IRA into a Roth IRA.

Details matter

The one important caveat is that if you have other IRA assets without a basis (for example, pre-tax contributions or gains) a portion of the gain will be taxable.

For tax purposes, you can’t pick which IRA to convert. Instead you have to assume that the money for the conversion comes proportionally from all your IRAs combined.

One option to offset this: Many 401(k) plans today accept existing IRA assets, so you could transfer existing pre-tax contributions and gains into your 401(k). That being said, if you have less than optimal investment options in your existing 401(k), that could make rolling your IRA into your 401(k) unattractive.

Avoid tax surprises

I do recommend working with a fee-only financial planner to assist with the process to avoid any unnecessary tax surprises — and, of course, to determine whether it is a wise move.

Some might ask why go through the hassle. According to Vanguard, the tax savings from the strategy can be significant over the long-term — hundreds of thousands of dollars if you start early enough — and this does not even include the benefit to your beneficiaries.