Author Topic: Gaming for Roth eligibility  (Read 2416 times)

michael

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Gaming for Roth eligibility
« on: May 06, 2013, 11:43:07 AM »
Hi there,
I currently am not eligible for a Roth IRA because my income is too high ($130k/year). I also have taxable interest that increased my taxable income to $145k last year.

So this year, I'm trying to fudge things to become eligible for a Roth, because I also contribute to a 401(k) at work, and therefore I don't qualify for tax-deductible T-IRA contributions. By mid-July I will have contributed the limit to the 401(k) - $17500 - which brings my estimated taxable income down (AGI) to $127500.

My employer currently pays for a low-deductible ($500) health insurance plan, but if I drop that and enroll in a $95/month HDHP, I qualify for a HSA - then I can contribute $3250 to the HSA, which brings my estimated AGI to $124250 - enough to barely qualify for a Roth. So it would cost me $1140/year to be in the HDHP, and I would theoretically save $910/yr in taxes (in the 28% California bracket) off that pre-tax $3250, so I would lose some in order to invest but I am assuming ROI in the HSA will compensate.

Under this scenario, I could contribute about $1000/year to a Roth (from the calculations here).

If my investments do better this year, this may all be moot as I doubt I could get my AGI down much further.

The other scenario I am thinking of is contributing to a T-IRA and doing the "backdoor" Roth conversion, but would this actually save me anything, since the contributions arent deductible?

Is this crazy? Is there a better way or is it even worth it?

secondcor521

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Re: Gaming for Roth eligibility
« Reply #1 on: May 06, 2013, 12:14:30 PM »
I could be wrong, but your complicated approach and the backdoor Roth approach both end up in the same spot -- $ in a Roth with no effect on your taxes.  The complicated approach is, uh, more complicated, and you won't be able to put as much into the Roth that way.  Also you're susceptible to getting a bonus later in the year that might push you out of the AGI window anyway.

Note that if you have a traditional deductible IRA already you have to prorate the backdoor Roth conversion amount; see the Bogleheads Wiki article (or the IRS if you want it from the horse's mouth) for details.

So for me, I'd do the backdoor Roth deal.

michael

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Re: Gaming for Roth eligibility
« Reply #2 on: May 06, 2013, 12:34:31 PM »
I think you might be right. I was dreaming this up while forgetting the fact that Roth contributions are not tax-deductible, so that was a pretty foolish omission.

I don't have an existing T-IRA - just the 401(k) and various taxable investment accounts.

Thanks for the gentle face-punch :)

Joet

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Re: Gaming for Roth eligibility
« Reply #3 on: May 06, 2013, 12:39:12 PM »
as stated when the IRS removed income restrictions for IRA conversions [traditional IRA---Roth] there is no longer any requirement to go through these shennanigans. Perhaps there is some benefit if you are concerned that in a future year the IRS has a 'lookback' provision and decides to make all such conversions subject to tax/etc

it only gets a little complicated if you have other dangling IRAs [which you said you do not], so no need to discuss the mitigation strategies there