How to contribute to a Roth IRA if you earn too much

By: Kimberly Lankford

A Roth IRA is a valuable savings tool that provides tax-free money in retirement. You don’t get a tax break for your contributions, but the money grows tax-deferred through the years and you can withdraw the earnings tax-free after age 59 ½, as long as you’ve had a Roth for at least five years. And you can access your contributions without penalties or taxes at any time for any reason.

But you can only contribute to a Roth IRA if your income is below the cut-off. To qualify for the full $6,000 contribution in 2019 (or $7,000 if you’re 50 or older), your modified adjusted gross income must be less than $122,000 if you’re single or $193,000 if married filing jointly. The contribution amount gradually phases out as your income rises, and you can’t contribute to a Roth IRA at all if you’re single earning more than $137,000, or $203,000 if you’re married filing jointly.

But there is a way to get money into a Roth IRA even if you earn too much. There’s no income limit to contribute to a traditional IRA that isn’t tax-deductible and then convert the money to a Roth IRA, a strategy called a “backdoor Roth contribution.” It’s a good idea to keep the money in the traditional IRA for at least a month before converting it to the Roth, so it’s clear on your investment statement that the contribution was to the traditional IRA. Contact your IRA administrator to make the conversion.

The tricky part, however, is the tax bill. You generally have to pay income taxes when you convert money from a traditional IRA to a Roth. The portion of any conversion that comes from nondeductible contributions is tax-free, but the rest of the conversion is taxable. If your traditional IRA contribution was not tax-deductible and you don’t have any other traditional IRAs, then the tax bill may be very small: You only have to pay income taxes on any earnings in the IRA between the time you made the contribution and when you converted to the Roth.

But the calculation becomes more complicated if you already have other money in traditional IRAs — either from earlier contributions and earnings or a rollover from a 401(k) or other retirement-savings plan — because you can’t pick and choose which money to convert. In that case, you need to add up the amount of money you have in all of your traditional IRAs and figure out what portion of the total balance is from nondeductible contributions. Only the percentage from nondeductible contributions is tax-free (because that money has already been taxed), and the rest of the conversion is taxable — no matter how much money you convert.

For example, if the balance in all of your traditional IRAs adds up to $60,000 and $6,000 of that total was from nondeductible contributions, then 10% of your conversion will be tax-free and 90% of the conversion will be taxable.

The conversion can still be worthwhile if you think that your income-tax rate is lower now than it will be in the future — the money will grow tax-free in the account from that point on. A Roth IRA also diversifies your tax situation in retirement — having a pot of money you can tap tax-free can be particularly helpful if the rest of your retirement savings is primarily in tax-deferred accounts that will boost your taxable income when withdrawn.

You have until April 15, 2020, to contribute to an IRA for 2019. For more information about who can contribute to an IRA, including some frequently overlooked ways to save for retirement, see Additional tax-advantaged ways to save for retirement.

Another way high earners can build up tax-free savings for retirement is to contribute to a Roth 401(k), if offered by your employer. There are no income limits to qualify to make Roth 401(k) contributions.

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