This blog describes a trick for people who have an income that is too high for them to contribute to a Roth IRA – they can still make a Roth IRA contribution.

Difference between Roth and IRA

  1. Traditional IRA, you receive a tax deduction for the amount you contribute.

Roth IRA, there is not tax deduction.

  1. Traditional IRA, you pay taxes on withdrawals as if you were receiving income.

Roth IRA, you do not pay any taxes on withdrawals.

  1. Traditional IRA, there is a 10% penalty on any distribution before 59.5 years old.

Roth IRA, you can remove the amount contributed if it is held in the Roth for at least 5 years, regardless of your age.  The amount contributed and earnings can all be distributed without penalty when you are over at least 59.5 years old.

  1. Traditional IRA, at age 70.5 you need to take required minimum distributions each year (starting at about 5%) and pay taxes on that distribution.

Roth IRA, there is no required distributions.

Roth Contribution Income Limits

Whether or not you can make the maximum Roth IRA contribution ($5,500 annually or $6,500 if you’re age 50 or older) depends on your tax filing status and your modified adjusted gross income (MAGI).

Your contribution can be reduced or “phased out” as your MAGI approaches the upper limits of the applicable phase-out ranges listed below.

Roth IRA phase-out ranges

Married, filing jointly$186,000–$196,000
Married, filing separately$0–$10,000

If you and your spouse didn’t live together during the taxable year, your filing status will be viewed as “single” for Roth IRA contribution purposes.

The Roth Contribution TRICK

If you still want to open a Roth IRA, a “backdoor” path could be your solution.

You can contribute to a non-deductible IRA.  Then convert the IRA to a Roth. There are three things to be careful about.

  • You need to file a Form 8606 for the tax year of the non-deductible contribution.
  • Generally, you should convert the non-deductible IRA to a Roth immediately because any gains in the IRA are taxable.
  • If you have an IRA already, you cannot exclusively take money from the non-deductible IRA. Even if the non-deductible IRA is in a separate account, any distribution is considered a proportional distribution from all IRA holdings.

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