One way to contribute to a Roth IRA, if you make more income than the limits allow, is to utilize a back-door Roth IRA conversion. First thing, although there are income limitations to funding a Roth IRA, there are no income limitations to converting to a Roth IRA. Once you have converted your IRA to a Roth IRA you will have to pay taxes on the conversion, but moving forward, your growth and your distributions from the Roth IRA will be tax-free.

The Roth IRA conversion is a commonly used strategy for those that earn an income which is above the asset limits for contributing to a Roth IRA. Here's a great article from here on Investopedia going into a little bit more detail about Roth IRAs and their contribution limits: This is also a great article with a video from here on Investopedia which goes into some very good detail about Roth conversions that is definitely worth taking a look at: Roth IRA contributions are in accordance with your Modified Adjusted Gross Income MAGI.

Any gains will be taxable upon the conversion if the conversion wasn't made simultaneously as the contribution. Keep in mind if you have other IRA assets such as traditional, SIMPLE, and SEP IRAs , the pro-rata rule will apply, where distributions made from an IRA pre-tax and after-tax will be proportional to each other. Essentially, they are categorized as one entire amount instead of being separate. The pro-rata rule excludes employer-sponsored plans such as k s, b s, and profit-sharing plans.

Congratulations on being in that envious position. Earning a high income does not exclude you from making a Roth contribution.

Assuming you have no other IRA traditional, SIMPLE, SEP account, first open a traditional IRA account and make a full non-deductible IRA contribution, then immediately convert to Roth.

If you wait too long and let the money grow in the traditional IRA account, you may have to pay some tax on the earnings when you do the final conversion. As soon as the money was deposited into the account, you requested a Roth conversion of the full amount. On the other hand, you made the same deposit to the traditional IRA. Instead of the immediate conversion, you heard a financial tip from a friend and bought a fund. The last thing you want to achieve is to pay the current higher tax, only to find out you will have a much lower tax bracket at retirement.

Individuals with incomes above the top number in each category cannot contribute to a Roth. However, all is not lost for those who exceed the limit.

Roth IRA Limits: See If You Qualify Based on Income | uyanilalabiwi.web.fc2.com

Here's how it works:. This backdoor strategy works best if you don't already have a traditional IRA because it will leave you owing no taxes on your contribution.

If you do have a traditional IRA that you have funded with contributions for which you took a deduction, however, the tax benefit will be reduced and computing your taxes becomes more complicated. You have no other traditional IRAs. Your tax bill for the conversion is zero because you did not deduct your contribution.

You got a tax deduction when you made the contribution. How much you owe depends on how large that rollover IRA is. If you have one or more IRAs that you funded with deductible contributions, even the backdoor strategy cannot keep you from owing taxes on a Roth conversion. You can't open a second IRA and roll over only that second account and owe no taxes, as in Situation 1.

The tax bill will be assessed regardless of whether a new or current account is used. Imagine you are the same age with the same income as in the previous examples. You could have several IRAs that were funded partly with deductible contributions and partly with nondeductible contributions. For the sake of simplicity, though, imagine you have just two traditional IRAs, one funded each way:. Your tax calculation would only include IRA 1, the deductible-contributions IRA.

It also excludes IRAs made with nondeductible contributions from the calculation. You can use the backdoor strategy to get into a Roth IRA in all these situations. One possible exception to this rule could be if you are dissatisfied with the investment choices that are offered inside the plan and wish to explore alternative options elsewhere. Click here for more information about opening a Roth IRA from Investopedia's Advisor Insights section. Here are the income limits https: However, you can contribute to a Nondeductible back door IRA regardless of your income level.

In general this is a great idea. Usually it makes sense to wait 30 — 60 days before doing the conversion. If you have more than one IRA, a rollover, one you opened years ago, a SIMPLE IRA, SEP IRA etc. That percent is then the tax free portion of the rollover. All other amounts will be taxable.

You should consult with a CPA or qualified Financial Advisor who understands your personal circumstances before acting.

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Brein, Josh Bellevue, WA. Great Question, One way to contribute to a Roth IRA, if you make more income than the limits allow, is to utilize a back-door Roth IRA conversion. Free Consultation Was this answer helpful? If you have any further questions, I'd be happy to help. Swanger, Rose Knoxville, TN. Hello, Congratulations on being in that envious position.

Investopedia New York, NY. Here's how it works: It is usually easiest, but not necessary, to use the same custodian that holds your Roth conversion IRA — or where you plan to open your Roth. Make a fully nondeductible contribution to your traditional IRA.

Next, convert the traditional IRA balance into a Roth IRA. Because the MAGI threshold for contributions does not apply to conversions, the income limitation is effectively thwarted.

Repeat this process every year that your MAGI is too high to allow you to make a direct contribution to your Roth IRA. Taxes and Other Considerations This backdoor strategy works best if you don't already have a traditional IRA because it will leave you owing no taxes on your contribution.

For the sake of simplicity, though, imagine you have just two traditional IRAs, one funded each way: The Bottom Line You can use the backdoor strategy to get into a Roth IRA in all these situations.

Dowling, Thomas M Hilton Head, SC.

What is a Roth IRA—and Why do You Need One? | uyanilalabiwi.web.fc2.com

If you make too much money you cannot contribute directly to a Roth IRA. One thing I will point out is please make sure you are aware of the Pro rata rule.

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