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.
By J. Matthew Illian
One big caveat to the tax-free Roth conversion: You realize full benefits only if you own no other pretax IRAs. Any other IRA accounts, including simplified employee pension IRAs or savings investment match plan for employees IRAs, ignites taxes on a portion of your conversion. Even if your TIRA contains only nondeductible contributions, the Internal Revenue Service taxes the percentage of your pretax IRA assets to total IRA assets. For example, Norm and Nancy are married and Norm has the only IRA account funded fully with pretax dollars. Both make $6,500 nondeductible contributions to their IRAs and immediately convert. Norm's conversion creates $6,175 of taxable income; Nancy's conversion is tax free. Norm's tax resulted from 95% of his IRA assets ($95,000 of $100,000) are pretax. Nancy's conversion is tax free because she owns no other pretax IRA assets. Thrift Savings Plan avoid pro rata taxation rules. Or perhaps he converts the entire IRA in 2013, pays tax based on the pro rate formula and frees himself to make tax-free conversions beginning in 2014. Clear out your IRAs to reap full benefits of a back-door Roth. A few extra steps make your retirement years a little more golden. -- By J. Matthew Illian, wealth manager for Marotta Wealth Management. He is based in Richmond, Va., providing fee-only financial planning and wealth management at emarotta.com and blogging at marottaonmoney.com. AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions. To subscribe to AdviceIQ's Rss feed for personal finance articles written by financial advisors and AdviceIQ editors,
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