Are you making more than the income limit to allow you to fund your Roth IRA? And after applying various strategies to lower your income, you are still above the income limit. So what do you do?
Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.
When all things fail, you can take advantage of the Roth IRA backdoor contribution. Here’s how it works:
1. You can make a NON-deductible traditional IRA contribution
2. Then convert it to a Roth IRA
3. If you don’t have any other money in an existing traditional IRA, you will only pay the taxes on the earnings when you convert
So this is like a tax loophole for the rich if you are making too money and you still want to fund your Roth IRA. However, here’s a tax trap you need to be aware of though – if you have money in an existing traditional IRA, your tax liability will be based on the ratio of nondeductible contributions to the total balance in all of your traditional IRAs. So watch out! If you have a sizeable 401-K account that was transferred to a traditional IRA, you probably have to think twice if you want to convert. However, if paying tax is a non-issue, and you’re looking at the long-term plan or goal – the big picture!, I would recommend that you convert the whole traditional IRA account into a Roth. Why? Because after holding it for 5 years and when you turn 59 ½, the contributions and earnings will all be tax-free!
So review your account and make sure to take advantage of the Roth IRA backdoor contribution.
If you like to learn more, click the link lowermytaxnow.com and sign-in to receive my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.