“Roth IRA Conversions for High-Income Earners”

Firstly, I’m amazed we are already in November!  It seems like 2019 just started, but alas we are only 2 months away from entering an entirely new decade.  As we think about how quickly time flies, it’s good to appreciate how important it is to get retirement accounts sorted out as early as possible in your career.  While we all know how important saving for retirement is, it can be difficult and sometimes daunting to sort through all the different investment options in front of us.  Should I save in my 401k, my IRA, my Roth IRA, or some other brokerage account?  Which accounts to choose for your retirement savings is definitely worthy of another blog post, but today we want to dive into the benefits of Roth IRA’s and specifically how high-income earners can access them.

What is a Roth IRA?

A Roth IRA is simply another type of individual retirement account that allows you to contribute up to $6,000 per year (2019 limit and is $7,000 if you are over 50).  The main benefit of this account is that while the initial contribution is NOT tax deductible, your investment grows tax free AND all of the principle and interest can be withdrawn completely tax free after age 59 ½.  In addition to the tax benefits of a Roth, they are also not restricted by required minimum distributions (RMD’s).  In a Traditional IRA you are required to begin pulling out your money when you reach age 70, but with a Roth IRA you have complete control over when you withdraw funds and you can even decide never to use the money and have it be a great estate planning tool.

Roth IRA’s have Income Restrictions

Unfortunately, in order to be eligible to contribute the full amount directly to a Roth IRA account in 2019 you cannot make more than $122,000 as a single tax filer OR $193,000 if filing jointly.  Therefore, for many high-income earners the Roth IRA seems to be an account that won’t work for them.  However, there is something called the backdoor Roth IRA which is a fantastic way for high-income earners to be able to contribute to a Roth IRA on an annual basis.

Traditional IRA to Roth IRA Conversions

In order to access a Roth IRA, a high-income earner can start by make a “non-deductible” contribution to a Traditional IRA account.  Since a Traditional IRA does not have income limits for contributions this non-deductible contribution is available to ANYONE regardless of how much money they make.  After making this contribution, you can do an immediate conversion from the Traditional IRA to a Roth IRA.  Since the initial contribution to the Traditional IRA was non-deductible, then the entire conversion to the Roth IRA is tax free!*  While this might seem sneaky, the IRS is completely aware of this loophole and even provides tax form 8606 to be completed each year that you make non-deductible contributions to an IRA. 

With the help of a financial advisor, the Roth IRA for high-income earners can be a great way to save for retirement and provide tax diversification on those savings.  If you, or someone you know, would like guidance in this area then reach out to one of our advisors today!

*Note: The conversion to a Roth IRA should be done as soon as possible to avoid gains on those funds, and if the investor has any other Traditional IRA dollars already then the conversion can have tax consequences.  We would encourage anyone to seek out guidance from their CPA or tax professional before proceeding.

November 1st, 2019