February 21, 2018
Dan Kresh FPQP TM
If your income is above the limit to contribute to a Roth IRA , that doesn’t mean you can’t get money into one. No matter your income (assuming your less than age 70 ½ and have earned income) you can contribute to a Traditional IRA. There may be limits to the deductibility of contributions for high income earners, but non-deductible IRA contributions could be made at any income level.
There’s a perfectly legitimate workaround to get funds into a Roth IRA indirectly; regardless of your income, if you pay income taxes on the funds going in. The Roth Conversion or “back door” enables you to convert funds from a Traditional IRA to a Roth IRA . This could allow you to convert contributions each year or convert any amount (principal or interest) to a Roth.
With a conversion, typically, the entire amount you convert, whether it’s deductible contributions or profit, counts as income in the year you convert . Consulting a tax professional is recommended if you are considering Roth conversions. Depending on your individual circumstances, and time horizon, converting to a Roth could be financially beneficial.
In my opinion, if your IRA contributions are already non-deductible due to your income, it’s a no-brainer to convert those contributions to a Roth each year. It’s a win-win. If your IRA would have after-tax money anyway, why shouldn’t you take advantage of the Roth? I think the only valid benefit of a traditional IRA over a Roth IRA is the deductibility and if that’s already off the table I would go Roth all the way.
In addition to converting new contributions each year you also can convert any and all of the funds you have accumulated in a traditional IRA. Since the entire amount converted could be counted as income in the year you do it, there should be careful tax planning, with a tax professional, regarding a Roth conversion strategy. This may be something you spread over multiple tax years.
You may have unique onetime deductions, in certain tax years, for a variety of reasons that ease the pain of the conversion. Perhaps you would be due a refund, equal to the tax liability of the conversion. Would the benefits of the Roth IRA be worth more to you than the refund? Maybe you’re at a crossroads in your career and your income is abnormally low, due to searching for a new job or going back to school. Maybe you bought a house and or solar panels and have extra deductions and credits. The list goes on and on.
I think, objectively, if you’re investing your retirement money and it grows, the longer your investments are in a Roth the more advantageous it is. I am more than happy to meet with you to discuss setting up a Roth IRA or facilitate a meeting with you and your tax professional to discuss a strategy for conversions. You work hard for your money, we work hard so your money can work for you.
v If you have a mix of deductible and non-deductible contributions in a Traditional IRA there is added complexity in the proper tax reporting of conversions. If converting a Traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously
deducted Traditional IRA contributions and on all earnings. A conversion may place you in a higher tax bracket than you are in now. Because Roth IRA conversions may not be appropriate for all investors and individual situations vary we suggest that you discuss tax issues with a qualified tax advisor.
You should always consult a tax professional and though this piece contains some tax information it should not be considered tax advice.