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November 1, 2014

Working Around The Roth Income Limit

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by Denise Appleby

Before January 1, 2010, anyone whose modified adjusted gross income (MAGI) exceeded $100,000, and/or whose tax filing status was married-filing-separately was ineligible to convert amounts to a Roth IRA.The Tax Increase Prevention and Reconciliation Act of 2005 repealed these restrictions. As a result, anyone can now convert eligible amounts to a Roth IRA.

However, MAGI limits still apply to regular Roth IRA contributions.

See limits at here.

Individuals who are unable to contribute to Roth IRAs because their income is too high can utilize the following method to work around that contribution income limit:

  • Contribute the amount to their traditional IRAs,
  • Immediately convert the amount to their Roth IRAs.If it is not done immediately, any earnings that accrue on the traditional IRA contribution would be taxed as ordinary income for the year of conversion.

Ideally, no tax deduction would be claimed for the traditional IRA contribution. This ensures that the conversion would be tax-free, providing the individual has no pre-tax amounts in any traditional, SEP and SIMPLE IRAs. For this purpose, all of an individual’s traditional, SEP and SIMPLE IRAs are aggregated and treated as one.

Caution: If this method is used, the conversion of the contribution amount will not be entirely tax-free if the client has pre-tax amounts in any traditional, SEP and SIMPLE IRAs. This is because distributions and conversions from an individual’s traditional, SEP and SIMPLE IRAs will always include a pro-rated amount of pre-tax and after tax balances, as long as the individual has pre-tax and after-tax amounts in any one or more traditional, SEP and SIMPLE IRAs.

Reminder: IRS Form 8606 must be filed to report the nondeductible contribution, and conversion of same.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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