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You Can Do a Back-Door Roth IRA

By J. Matthew Illian

NEW YORK (AdviceIQ) -- Many high earners find the front door locked when trying to fund a Roth individual retirement account directly. When the front door's locked, try the back.

This year, married couples filing taxes jointly begin to lose eligibility to contribute directly to a Roth IRA -- and reap its tax-free benefits -- when their modified adjusted gross income reaches $178,000. The phase-out range for individuals is $112,000 to $127,000. If your income makes you eligible, just open a Roth and fund it.

Steps for the back-door method take more work:

Make a nondeductible contribution to a traditional IRA. These accounts impose no income limit for contributing to a TIRA, but you do not get to deduct the contribution against your income. Even the highest-paid athlete (golf megastar Tiger Woods, according to Forbes, who last year putted his way to $78.1 million), can contribute $5,500 this year. Those 50 or older can add another $1,000, for a total of $6,500.

Convert a traditional IRA to a Roth IRA. When your TIRA contribution posts, convert the funds to a Roth IRA. Because you initially invested after-tax dollars, the conversion incurs no taxes. You now have tax-free money in your Roth IRA.

Repeat every year. Beginning at age 50, a couple can begin saving $13,000 every year and move $130,000 into a Roth IRA over the next 10 years. It will never taxed again.

If you left this $13,000 in a nonqualified taxable investment account or savings account, your interest and dividends suffer taxes every year. In the highest income tax brackets, you see rates approach or exceed 50% when including state and local taxes.

A high-income couple using this method to move $13,000 annually saves a bundle. At a 2% growth rate, tax savings top $4,861 over 10 years. An 8% growth rate produces tax savings exceeding $25,856.

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