Author Topic: Roth IRA Question  (Read 2461 times)

lawstudent

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Roth IRA Question
« on: March 30, 2016, 10:54:54 AM »
Hi all -- I'm about to graduate from law school and I don't start my job until September.  I've been contributing the maximum amount to my Roth IRA since I was around 18 years old (I am 25 now).  The salary for my job that I'll be starting after graduation, however, makes me ineligible to contribute to a Roth IRA.  My question is, can I contribute the maximum amount before I begin this job?

Thank you for any input you may have.

LeRainDrop

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Re: Roth IRA Question
« Reply #1 on: March 30, 2016, 11:01:55 AM »
Hi, fellow attorney here.  In your first "year" -- September through December -- I doubt you would earn enough money to exceed the income limit for a Roth IRA contribution ($116,000 if you are single).  Even if you are getting the biglaw stipend through the summer, it's pretty unlikely that you would exceed the max in that stub year.  In any event, even if you do exceed the income limit in the stub year and for all subsequent years, you can still contribute to a Traditional IRA and then immediately roll it over to a Roth IRA.  This is commonly known as the "backdoor Roth IRA conversion."  It is a very common thing for high income earners to do.  You will not get the tax deduction for the contribution into the Traditional IRA that people below the income cap would get -- i.e., you pay the tax on that income now -- but that's just how it is.  If you do the conversion really quickly, you would have very minimal, perhaps even zero, tax liability when you convert the Traditional IRA to the Roth IRA because the likelihood of the value of the investment gaining much in that short time is really low.  If you have Vanguard, Fidelity, or similar, just give them a call and let them know you want to be able to do the backdoor Roth IRA, and their personnel are well-trained to talk you through the exact process to follow.

ETA:  To be clear, your eligibility to contribute directly into a Roth IRA (not the backdoor method) is based on your earned income for the calendar year, not your salary.  Example:  Your annual salary is $200,000.  In year 1, you work September through December, so you only earned $66,667 = eligible for direct contribution into Roth IRA.  In year 2, you work the full year, so you earned $200,000 = not eligible for direct contribution into Roth IRA, but can contribute into the Traditional IRA (without getting the normal tax deduction) and then convert that into a Roth IRA via backdoor method.
« Last Edit: March 30, 2016, 11:05:29 AM by LeRainDrop »

NoStacheOhio

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Re: Roth IRA Question
« Reply #2 on: March 30, 2016, 01:43:48 PM »
Assuming a job with that high a salary offers tax-deferred retirement accounts, you should max those before doing the backdoor Roth.

forummm

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Re: Roth IRA Question
« Reply #3 on: March 30, 2016, 04:49:06 PM »
And with a big income, you might be better off contributing to a traditional IRA if your income is low enough for the calendar year to get the full deduction. You can still contribute for 2016 as late as April 15, 2017. So you can wait until you total your income to see which IRA option works best for you, and then make the contribution.