Unlike traditional IRAs, Roth IRAs have an income threshold. The ability to make a direct contribution to a Roth IRA phases out for single filers with an adjusted gross income between $125,000 and $140,000, for 2021. For joint filers, it phases out between $198,000 and $208,000.
There are no income limits on nondeductible IRAs or conversions to a Roth. Since these contributions are nondeductible and have already been taxed, you can convert the money tax-free. So for those with income over the thresholds, you can make nondeductible contributions to a traditional IRA and then convert the traditional IRA to a Roth IRA!
Beware though, if you have any deductible contributions in a traditional IRA, then only a portion of the funds converted to a Roth will be tax-free. You have to calculate the ratio of your nondeductible contributions compared with the total in the traditional IRA. That percentage will be tax free when you convert.
For example, if you have $10,000 total in your traditional IRA with $1,000 in nondeductible contributions and $9,000 in deductible contributions then just 10% will be tax-free. You must pay your ordinary income tax on the remaining amount.
Here’s another trick! You could also rollover funds from a 401(k) account into a Roth IRA when you leave a job, if your 401(k) plan allows for this type of transfer. You will owe income taxes at your ordinary rate on any funds you put into your 401(k) pretax.
Once you have converted either a 401(k) or a traditional IRA to a Roth, your withdrawals will be tax-free as long as you are at least 59 ½ and have had the Roth for a minimum of five years. You also won’t have to take required minimum distributions once you hit the age of 72.
Compass Asset Management Group, LLC is a private financial planning and wealth management firm delivering tailored planning and investment strategies to select clients. We combine research from the largest firms on Wall Street with over fifty years of market experience to provide strategic, tactical and dynamic investment management. Compass Asset Management Group, LLC delivers personalized financial planning, estate planning and investment management advice in a private setting with a high degree of sensitivity to your concerns and objectives. Our goal is to exceed yours expectations by listening closely, understanding deeply and communicating frequently through personal consultations entirely focused on you.
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Please note that the content of this blog does not constitute tax advice and is only intended for the educational purpose of the reader. Please consult your tax advisor for specifics regarding your circumstances.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.
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