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How To Get Extra Money In A ROTH

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How To Get Extra Money In A ROTH

How To Get Extra Money In A ROTH, Even When You Have Exceeded Your Allowance!

Back Door Roth

I think we will all agree that a funded ROTH IRA is a wonderful retirement vehicle.  The problem is getting money into a ROTH IRA if you are excluding from contributing every year.  Luckily there is a solution to this problem.  First let’s discuss why the ROTH IRA is such a favorable a retirement vehicle;

  • Tax Free Withdrawals- If held for more than 5 years and age 59 ½ when withdrawn.
  • No Required Minimum Distributions (RMDs)- since there is no requirement to withdraw, there are no RMDs
  • No Age Limit- No requirement to stop contributing at 70 ½ as long as you have earned income
  • No Employer-Plan Restrictions- It is not tied to the amount that you contribute to other employer plans
  • Estate Planning Benefits- You can pass your ROTH IRA to your beneficiaries and they will receive tax-free withdrawals.  If you inherit a Roth IRA, you must take RMDs, but they're tax-free as long as the original account owner held the account for at least 5 years.

What Are the ROTH Funding Restrictions?

Contributors MUST have earned income, self-employed income or taxable alimony.

The contributor income must be below the applicable 2015 inflation adjusted Modified Adjusted Gross Income level as follows;

  •  Single, Head of Household    $116,000- $131,000
  •  Married Filing Joint                $183,000 - $193,000
  •  Married Filing Separate          $0- $10,000

Solution:   Back Door ROTH: 

Contribute to a Non-Deductible Traditional IRA;

Allow Appropriate Time, and;

Convert to a Roth IRA.

What Are the Deductible Traditional IRA Funding Restrictions?

Contributor MUST have earned income, self-employed income or taxable alimony.

The contribution must be below the applicable 2015 inflation adjusted Modified Adjusted Gross Income level as follows;

  • Single, Head of Household    $61,000- $71,000
  • Married Filing Joint                $98,000 - $118,000
  • Married Filing Separate          $0- $10,000

 

If Spouse is an active participant in a Employer Sponsored Retirement Plan

 

  • Married Filing Joint                $183,000 - $193,000
  • Married Filing Separate          $0- $10,000

 

NOTE:  The phase-out levels for an allowed Traditional IRA contribution are much lower than the ROTH IRA.  Therefore, if you are restricted from contributing to a ROTH IRA, any contribution to a Traditional IRA would be considered a Non-Deductible Traditional IRA Contributions.

 

So How Does The Back Door ROTH Work?

Step One- Contribute To A Non-Deductible Traditional IRA-  If your Modified Income is above the thresholds previously mentioned for the Traditional IRA and you make an allowed contribution, it is considered a Non-Deductible Traditional IRA contribution.  As such your contribution has a basis for ROTH conversion purposes. 

Step Two- Wait an appropriate amount of time-  To avoid the Step-Transaction Doctrine, your best defense is time.  There are differing opinions on the appropriate amount of time, anywhere from one IRA statement period to one year or more.  Recent action by the administration have all but given a passive approval to the Back Door ROTH but your concern for the Step-Transaction Doctrine should dictate the amount of time you wait before conversion.

Step Three- Convert To A ROTH IRA- Since the previous Non-deductible Traditional IRA contribution has a basis for conversion, when you convert it to a ROTH IRA it will be converted Tax- Free.  Any growth in the account from the time of contribution until conversion will be a taxable conversion, but that is likely to be small amount.

Mega Back Door ROTH. Take the Back Door ROTH To The Next level Using Your Employer Sponsored Retirement Plan!

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