How to get around the Roth IRA Income Limits

Most financial experts will tell you that a Roth IRA is one of the best retirement vehicles you can use. It does come with a number of challenges however, including limits that prevent some people from directly funding their Roth IRA account. If your income exceeds those limits the steps below will help you. Enjoy.

First, in order to open and directly fund your Roth IRA, including contributing fully to it, you need to have an annual income that’s less than $129,000 as a single person or, if you’re a married couple, hundred $91,000.

There is a “back door” method of converting tax-deferred IRAs, including traditional, SEP or simple IRAs, to Roth IRAs if your income is above these limits. (Talk to your financial advisor.) The benefits of converting are that you get tax-free accumulation and, in retirement, tax-free withdrawal, meaning that your stress about future income taxes will be a lot lower. Also, since Roth IRAs have no required minimum distributions (unlike traditional IRAs) it’s a better situation for the original account holder.

Before age 59 ½ you can also withdraw any money you converted penalty free if you satisfied the five-year holding period for each conversion. (Keep in mind this does not include gains.)

The value of the investments held in your IRA when you convert it to a Roth IRA will determine your tax liability. In the year that you convert the amount converted will be included into your taxable income, so you want to look at the IRS tax brackets for information to find out exactly what would happen to your tax bracket based on any conversion you’re considering. One good thing is that you don’t have to convert all of your tax-deferred IRA to a Roth IRA and, if you wish, you can convert just a part of it.

Some of the decision factors that you need to keep in mind before converting include;

  • Your ability to afford the taxes when they come due
  • Your current tax rate, and your expected future tax rate. If you believe you’ll be in a higher tax bracket later, a Roth conversion might be the best that now
  • The time period you have for making withdrawals
  • The decision to leave (or not) a tax-free IRA to your heirs

Before making any decision to convert from an IRA to a Roth IRA you’ll definitely want to talk to your financial advisor and familiarize yourself with the income limits that Roth IRAs have. The reason is simply that you want to make sure that the benefits of converting to a Roth IRA outweigh the actual costs of the conversion.

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