Author Topic: Any way to get a tax free Roth with high income?  (Read 3874 times)

Mr Mark

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Any way to get a tax free Roth with high income?
« on: May 14, 2012, 10:26:04 AM »
Right now I'm fortunate enough to have a pretty high income, >200k last year. But this means I can't start any tax free accounts like Roths it seems.  Plus my employer doesn't offer a 401k.

Is there anyway to get around this, or are we stuck with tax free Munis et al?

arebelspy

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Re: Any way to get a tax free Roth with high income?
« Reply #1 on: May 14, 2012, 11:48:08 AM »
Right now I'm fortunate enough to have a pretty high income, >200k last year. But this means I can't start any tax free accounts like Roths it seems.  Plus my employer doesn't offer a 401k.

Is there anyway to get around this, or are we stuck with tax free Munis et al?

Google "back door Roth."
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Mr Mark

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Re: Any way to get a tax free Roth with high income?
« Reply #2 on: May 14, 2012, 01:55:15 PM »
Thanks!

That looks like the thing to do. This way we can put 10k/yr into a tax free Roth. Sweet.

OK, it's not huge, but every bit helps! Wish I'd done it earlier.

arebelspy

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Re: Any way to get a tax free Roth with high income?
« Reply #3 on: May 14, 2012, 02:02:44 PM »
OK, it's not huge, but every bit helps!

Absolutely!  Cheers!
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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James

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Re: Any way to get a tax free Roth with high income?
« Reply #4 on: May 14, 2012, 08:23:41 PM »
Thanks for the tip, I hadn't considered that.  I haven't been able to contribute for a couple years, but my employer just started a Roth 401k plan and I thought that would be the only Roth option for me.  Since I have maxed out the 401k I can't contribute more to the Roth401k, but I can plan on creating a back door Roth by the end of the year.


I appreciate the tip!

arebelspy

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Re: Any way to get a tax free Roth with high income?
« Reply #5 on: May 14, 2012, 09:19:46 PM »
Of course.

I'm jealous of you who are ineligible for a regular Roth.  ;)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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James

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Re: Any way to get a tax free Roth with high income?
« Reply #6 on: May 15, 2012, 03:24:49 PM »
Of course.

I'm jealous of you who are ineligible for a regular Roth.  ;)

It's certainly a nice "problem" to have...  :)

jgo

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Re: Any way to get a tax free Roth with high income?
« Reply #7 on: October 30, 2012, 08:54:57 PM »
Way late to this party, apologies...

If your employer offers a 401(k) with an after-tax (not Roth, but after tax) contribution option AND offers in-service distributions, then you can toss quite a hefty chunk of change (up to $50k) into a Roth IRA every year via a rollover.

Basic idea:
- You pay taxes on your money
- You contribute said after-tax money to your 401k (after-tax contribution)
- A few times a year (number defined by your plan), you call up your plan and request an in-service distribution of your after-tax funds
- You roll this in-service distribution directly into a Roth IRA. This direct rollover is what prevents you from paying the penallty for early withdrawal
- You pay taxes only on the earnings of your contributions (which had <1 year to earn money, hopefully only 1 quarter), then once these taxes are paid this money is also bundled into your new Roth IRA

A decent description of this can be found here:
http://cdn.ameriprisecontent.com/cds/alwp/advisor/jay.d.jacobs/cusersjjacob3desktopjump-start-your-roth-ira-with-a-401k-after-tax-conversion-4-11634680185434967153.pdf

Note that this is NOT a contribution to an IRA, it's a rollover--you can still contribute $5k to your Roth IRA (if you were eligible, anyway).

Also note that your tax-sheltered 401k contributions are limited to $17,000 (2012), but the limit for total contributions (tax-sheltered, employer match, and after-tax dollars) is $50,000 or 100% of compensation (2012). 

It's basically the same idea as the 'backdoor' IRA (nondeductible IRA converting to Roth IRA) but I believe without all of the hassle involved in tracking tax basis.

In the process of doing my first rollover.... If anyone else has done this let us know!

kkbmustang

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Re: Any way to get a tax free Roth with high income?
« Reply #8 on: October 30, 2012, 09:29:31 PM »

Also note that your tax-sheltered 401k contributions are limited to $17,000 (2012), but the limit for total contributions (tax-sheltered, employer match, and after-tax dollars) is $50,000 or 100% of compensation (2012). 


FYI, it's the LESSER of $50,000 (2012) or 100% of compensation.