Bankrate: 'Backdoor' Strategy Can Get High-Income Earners Into Roth IRAs

Tuesday, 19 Aug 2014 11:55 AM

By Michelle Smith

  Comment  |
   Contact  |
  Print   |
    A   A  
  Copy Shortlink
Due to income restrictions Roth IRAs are generally off limits to high-income earners, unless they use the 'backdoor' strategy, Bankrate explains.

In 2014, individuals younger than 50 can put $5,500 of their taxed earnings in a Roth IRA, and people 50 or older can contribute $6,500.

Roth IRAs have a number of attractive benefits, including contributions are already taxed so the money grows and can be withdrawn tax-free, the money only has to remain in the account for five years and then can be withdrawn regardless of age and the funds can be left in the account forever, Bankrate notes.

Editor’s Note:
Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

But if you're single and your modified adjusted gross income (AGI) is $129,000 or more or you're married filing jointly and your modified AGI is $191,000 or more, IRS rules prohibit you from contributing to a Roth IRA.

The backdoor strategy provides a workaround.

Anyone can contribute to a nondeductible IRA, in which only the earnings are taxed when withdrawals are made, according to Bankrate. And since 2010, anyone, regardless of income, can convert those nondeductible IRAs into Roth IRAs, hence the term backdoor.

Going through the back door is one of the only ways that high earners can get money into a Roth IRA, Lynn Mayabb, managing director at BKD Wealth Advisors, tells Bankrate.

"If you're saving anyway, why not allow your money to grow tax-free and be tax-free in the future?" she questions.

However, financial experts warn that individuals must exercise caution if they plan to use the backdoor Roth IRA strategy because it might not be a good idea for everyone.

"You have to consider all your IRAs and where those dollars came from," Mayabb notes. "If you have another IRA out there and if you originally took a tax deduction on those dollars, that will affect your tax liability on the Roth IRA."

"If you screw up the calculations or if the custodian does, there could be a problem with the IRS," warns Jean Dorrell, a certified estate planner and founder of Senior Financial Security in The Villages, Fla.

Moreover, since the backdoor Roth IRA strategy is fairly new and no one has reached eligibility for the five-year withdrawal, no one knows how severely those IRS actions will be, Dorrell tells Bankrate.

Therefore, the backdoor IRA strategy is best for high-income earners "who don't have other IRAs or who have rolled deductible IRAs into a 401(k) plan, eliminating it from being considered," Mayabb adds.

It's never been more important to shield as much income from taxes as possible, writes Forbes contributor Ron Berger.

The highest individual federal income tax rate is 39.6 percent. Add payroll taxes, state and local income taxes, alternative minimum tax and loss of the value of deductions and exemptions, and many people keep less than they pay in taxes above certain income levels, Berger argues.

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

Related Stories:

© 2014 Moneynews. All rights reserved.

  Comment  |
   Contact  |
  Print   |
  Copy Shortlink
Around the Web
Join the Newsmax Community
Please review Community Guidelines before posting a comment.
>> Register to share your comments with the community.
>> Login if you are already a member.
blog comments powered by Disqus
Zip Code:
Privacy: We never share your email.
Follow Newsmax
Like us
on Facebook
Follow us
on Twitter
Add us
on Google Plus
Around the Web
You May Also Like

John Kasich 2016: 7 Key Political Positions of GOP Presidential Hopeful

Friday, 19 Dec 2014 22:22 PM

John Kasich has been involved in the national scene since the 1980s as a U.S. congressman and popular governor from Ohio . . .

Stocks Rise in Best Week Since October as Energy Industry Gains

Friday, 19 Dec 2014 16:56 PM

Oil and gas companies led the stock market up Friday, helping the Standard Poor's 500 index notch its second-best week . . .

Fed's Williams Sees June as Time to Start Considering Higher Rates

Friday, 19 Dec 2014 15:10 PM

Federal Reserve Bank of San Francisco President John Williams said next June will be the right time to consider when to  . . .

Most Commented
Top Stories

Newsmax, Moneynews, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, NewsmaxWorld, NewsmaxHealth, are trademarks of Newsmax Media, Inc.

America's News Page
©  Newsmax Media, Inc.
All Rights Reserved