Roth IRAs are for those under a certain income level.
Your income is too high for a Roth IRA.
Not a terrible problem to have.
You make good money.
Specifically, your adjusted gross income (AGI) for last year was more than $132,000 if you are single or $194,000 if you are married and filing jointly.
You can instead make nondeductible contributions with certain limits to a traditional IRA.
You would prefer your investments grow in a Roth.
Is there a workaround?
According to a recent Kiplinger article titled “How High Earners Can Set Up a Roth IRA,” there may be.
What is it?
Make a contribution to your traditional IRA then convert it into a Roth.
You can convert money from a traditional IRA to a Roth IRA at any income level.
Are these deductible contributions?
If your work does not have a retirement plan for you, it is a possibility.
Will I owe taxes on the conversion?
Yep, unless the contribution to the traditional IRA was nondeductible, you will owe taxes on the whole conversion.
If you only have the nondeductible IRA, you will only owe taxes on the growth from the time you contributed to the time you converted the IRA.
If you have funds in multiple IRAs, things may be a bit more complex.
Taxes include money in SEP and SIMPLE IRAs because they are based on the ratio of nondeductible contributions to the amount of all traditional IRAs.
Money already in Roth IRAs is not included.
Is there an optimal time to convert?
You must make any IRA contributions for 2016 before April 18, 2017.
Any time after this, you can convert.
Doing it a day after you contribute may be best.
It establishes the contribution as being to a traditional IRA.
It also allows the least amount of time for earnings to be generated before you convert to a Roth.
Is this good?
It means you will owe fewer taxes on earnings in the account.
To determine if this is a good option for you, work with an experienced financial advisor, tax consultant and estate planning attorney.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Kiplinger (February 24, 2017) “How High Earners Can Set Up a Roth IRA”