Have you been locked out of contributing to a Roth individual retirement account (IRA) by the tax law’s income limits? There may be a way you can get around those limits and invest in a Roth IRA.
Why Consider a Roth IRA?
Unlike a traditional IRA, a Roth IRA offers the potential for tax-free earnings. You’re not taxed on investment earnings while they remain in the account, and qualified Roth distributions are not included in taxable income. If you want, you can leave your Roth IRA intact for your beneficiaries since you won’t have to take required minimum distributions (RMDs) after age 70½.
Their potential for tax-free growth makes Roth IRAs a powerful planning tool. However, high earners face contribution restrictions. No Roth IRA contribution is allowed if modified adjusted gross income (AGI) is more than $135,000 (unmarried filers) or $199,000 (married joint filers).
A Potential Solution
Even if you aren’t allowed to contribute to a Roth IRA directly, you still may convert a traditional IRA to a Roth IRA. No income limits apply to conversions. This opens up a planning possibility: Make nondeductible contributions to a traditional IRA and later convert it to a Roth IRA. Repeating this process over several years would allow you to build up the amount in your Roth IRA. You’d be taxed on the account earnings you convert, but the taxable amount may be small if you haven’t held the traditional IRA for long.
Caution: This strategy could backfire if you already have a large traditional IRA (from a plan rollover or regular contributions). Under complex rules, much more of each conversion amount would be subject to tax. See us for details.
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