The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: RelaxationSpecialist on January 29, 2015, 07:01:47 AM
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I have an awesome problem I could use some help with! :)
In 2014 my husband and I earned too much to contribute to my Roth IRA. (yes, I know it's 2015, but I still have until April 15th to fill my 2014 bucket with $5,500 IRA dollars. Haven't done any 2014 contributions to my IRA). I feel like this is a fan-freaking-tastic issue to have. It means that we kicked our earnings up in a huge way!! So, yea to that! My question is, should I just open a 'Traditional IRA' and contribute to that in the years that we earn over the limit and contribute to the Roth in lower earning years... OR... has anyone used this 'Backdoor' strategy to make Roth contributions outlined below after the ***'s??
Also, I already have the cash for my 2015 bucket ready to go, so what would happen if I contribute to the Roth and then at the end of 2015 we again go over the earnings limit?? Thank you so much for the help!!! <3 <3
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Although Roth IRAs provide many advantages for lower- and middle-income retirement savers, those with modified adjusted gross incomes (MAGI) above a certain amount are subject to a contribution phase-out schedule, adjusted for inflation each year, that eventually disallows direct contributions. In 2014, the schedule for married taxpayers filing jointly is $181,000-191,000; for Single and Head of Household filers, it's $114,000-129,000. Individuals with incomes above the top number in each category cannot contribute to a Roth.
However, all is not lost for those who exceed the limit. The removal of the $100,000 MAGI limit for Roth conversions in 2010 created a loophole in the tax code that allows high-income filers to legally funnel money into Roth accounts using a “back door IRA” strategy. Here's how it works:
-Open a traditional IRA with your IRA custodian of choice. (It is usually easiest, but not necessary, to use the same custodian that holds your Roth conversion IRA – or where you plan to open your Roth.)
-Make a fully nondeductible contribution to your traditional IRA. The contribution limits in 2014 are $5,500 for those under age 50, plus an additional $1,000 catch-up contribution for those aged 50 and above. If your MAGI exceeds the Roth limit, as described above, you are automatically ineligible to deduct your contribution if either you or your spouse – if you're married – participates in an employer-sponsored qualified plan of any kind. If neither you nor your spouse is a qualified-plan participant, simply refrain from reporting your traditional IRA contribution as a deduction for MAGI on your 1040.
-Next, convert the traditional IRA balance into a Roth IRA. Because the MAGI threshold for contributions does not apply to conversions, the income limitation is effectively thwarted.
-Repeat this process every year that your MAGI is too high to allow you to make a direct contribution to your Roth IRA.
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Yes, I've done this the last couple of years. I am not an accountant, tax preparer, or financial advisor, but started using the IRA conversion strategy on professional advice. I do believe there is some rule about not having any other traditional IRA, so checking the fine print or using a professional to get it right is recommended. I know that I can do the conversion path every year since I have no other traditional IRA, but my husband cannot since he has a Simple IRA as his self-employment retirement vehicle.