How to invest in a Roth IRA When You Make Too Much Money

rothira

If you are considering investing in a Roth IRA, it is a great way to save money for retirement.  Because, you and I know that a 401k, 457, 403, 227 isn’t enough! Wait that last one isn’t a retirement plan, but you get my point.  However, there will be a problem if you want to contribute directly to the Roth IRA if you have an income that’s too high. The good news is, there is a backdoor….

 

Backdoor Roth IRA for High Income Earners

 

If you would like to contribute to a Roth IRA but, do not meet the income guidelines, the best thing to do is to go through a tiny loophole left by congress.  This means you will need to open a non-deductible traditional IRA account. When you have successfully done so, the next thing you need to do is convert the account into a Roth IRA.

 

Is It Worth It?

 

If you were already able to convert your traditional IRA plan into a Roth IRA, the usual question is to ask is ‘is it worth it?’ Well, as long as you have the money for it, then it will be well worth it.  What do I mean by “If you have the money for it?”  Well, you will have to pay taxes on the converted money!  So, if you can afford to take a tax hit now (at your current tax rate) to avoid paying taxes later (at your possible higher tax rate) it may be worth it it.

 

Here is a good example of it being worth it!

 

 

Why Go Through So Much Trouble for the Roth IRA Plan?

 

While there is the option to get the traditional IRA, you can always depend on the Roth IRA to be a better choice. This is because this option is an amazing deal, especially if you are looking for a long-term deal where you can enjoy higher tax rates in the future. Even if you start taking money out from the account, you can still gain from it because everything is income-tax-free.

 

On the other hand, a traditional IRA will grow you tax-deferred earnings.  At the same time, you will have to start taking the necessary mandatory distributions the year after you have turned 70. During this time, your distributions will already start counting as an income. With the Roth IRA option, you can maintain your tax bite down in retirement.

 

If you have a high income and you will use the traditional IRA option, you will lose your benefits to the high marginal tax rates during your retirement; especially with the forced RMDs (Required Minimum Distribution). This is why higher earners are being prevented or limited from using the Roth IRA option so they can dodge this event.

 

So if you wish to invest in an IRA, and thought you were limited by your high income you should consider your options. If you have decided to go with the Roth IRA after reading this post, you will have to make sure that you understand everything necessary to make the conversion process a smooth one!

 

Conversion Steps…

  1. Evaluate your IRA and 401(k).
  2. Seek advice if you’re unsure.
  3. Weigh financial and tax factors.
  4. Calculate the potential tax due.
  5. Decide when to pay the tax bill.
  6. Consider when to convert.
  7. Fill out conversion paperwork.

 

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