hopkinton-independent-logo2x
Hopkinton, MA
loader-image
Hopkinton, US
2:57 am, Tuesday, November 5, 2024
temperature icon 47°F
Humidity 92 %
Wind Gust: 4 mph

SIGN UP TODAY!
BREAKING NEWS & DAILY NEWSLETTER





Professional Insights: Open the (back) door to a Roth IRA

by | Mar 13, 2023 | Business, Featured

There aren’t many drawbacks to having a high income — but being unable to invest in a Roth IRA might be one of them. Are there strategies that allow high-income earners to contribute to this valuable retirement account?

Before we delve into that question, let’s consider the rules. In 2023, you can contribute the full amount to a Roth IRA — $6,500, or $7,500 if you’re 50 or older — if your modified adjusted gross income is less than $138,000 if you’re single, or $218,000 if you’re married and filing jointly. If you earn more than these amounts, the amount you can contribute decreases until it’s phased out completely if your income exceeds $153,000 (single) or $228,000 (married, filing jointly).

A Roth IRA is attractive because its earnings and withdrawals are tax free, provided you’ve had the account at least five years and you don’t start taking money out until you’re 59 1⁄2. Furthermore, when you own a Roth IRA, you’re not required to take withdrawals from it when you turn 72, as you would with a traditional IRA, so you’ll have more flexibility in your retirement income planning and your money will have the chance to potentially keep growing. But given your income, how can you contribute to a Roth?

You may want to consider what’s known as a “backdoor Roth” strategy. Essentially, this involves contributing money to a new traditional IRA, or taking money from an existing one, and then converting the funds to a Roth IRA. But while this backdoor strategy sounds simple, it involves some serious considerations.

Specifically, you need to evaluate how much of your traditional IRA is in pretax or after-tax dollars. When you contribute pretax dollars to a traditional IRA, your contributions lower your annual taxable income. However, if your income is high enough to disqualify you from contributing directly to a Roth IRA, you may also earn too much to make deductible (pretax) contributions to a traditional IRA. Consequently, you might have contributed after-tax dollars to your traditional IRA, on top of the pretax ones you may have put in when your income was lower. (Earnings on after-tax contributions will be treated as pretax amounts.)

In any case, if you convert pretax assets from your traditional IRA to a Roth IRA, the amount converted will be fully taxable in the year of the conversion. So, if you were to convert a large amount of these assets, you could face a hefty tax bill. And since you probably don’t want to take funds from the converted IRA itself to pay for the taxes, you’d need another source of funding, possibly from your savings and other investments.

Ultimately, then, a backdoor Roth IRA strategy may make the most sense if you have few or no pretax assets in any traditional IRA, including a SEP-IRA and a SIMPLE IRA. If you do have a sizable amount of pretax dollars in your IRA and you’d still like to convert it to a Roth IRA, you could consider spreading the conversion over a period of years, potentially diluting your tax burden.

Consult with your tax advisor when considering a backdoor Roth strategy. But if it’s appropriate for your situation, it could play a role in your financial strategy, so give it some thought.

If you would like to discuss your personal situation with a financial advisor contact:

Mark FreemanMark Freeman
Edward Jones Financial Advisor
77 W. Main Street, Hopkinton, MA
(508) 293-4017
Mark.Freeman@edwardjones.com

The advertiser is solely responsible for the content of this column.

0 Comments

Related Articles

Professional Insights: Heating tips to help save money

As temperatures start to drop and the vibrant foliage transforms our neighborhoods, it's the perfect time to cozy up your home for the fall season. It’s important to keep your space warm and inviting, and here are some easy heating, air conditioning and ventilation...

Professional Insights

Professional Insights: Do you need to fear retirement?

If you’re planning to retire in a few years, are you looking forward to it? Or are you somewhat apprehensive? Are you asking yourself: “What sort of retirement can I afford?” It’s a good question — because the answer can make a big difference in your ability to...

Professional Insights

Professional Insights: How should you respond to market cycles?

The movement of the financial markets can seem mysterious — and yet, if we look back over long periods, we can see definite patterns that consistently repeat themselves. As an investor, how should you respond to these market cycles? To begin with, it’s useful to...

Professional Insights

Professional Insights: Are you afraid of outliving your money?

Do you worry about running out of money during your retirement years? If so, how can you help prevent this from happening? In the first place, if you have this type of fear, you’re far from alone. Consider this: 58% of retirement savers from all age groups,...

Professional Insights
Key Storage 4.14.22