Roth IRA’s are some of the last truly tax-free investments you can make. Unlike traditional IRA’s, where your earnings are taxed as income, earnings in a Roth are completely tax-free. That’s the good news. The bad news is, not everyone qualifies to be able to contribute to a Roth. For 2016, if your file your taxes as single, you can make a full contribution up to $5,500 per year ($6,500 over age 50) if your modified adjusted gross income (MAGI) is less than $117,000, and a partial contribution if your MAGI is between $117,000 and $132,000. If you file taxes jointly, you can make a full contribution if your income is less than $184,000, and a partial contribution if your MAGI is between $184,000 and $194,000. If you file single and make over $132,000 or file jointly and make over $194,000, you’re out of luck for making a Roth contribution. That is unless you go in through the “back door”.
A “back door Roth” takes advantage of the current Roth conversion rules. Here’s how it works…
- Make a full, non-deductible, contribution to a traditional IRA
- Soon after the contribution clears, convert the traditional IRA to a Roth IRA
That’s all there is to it. You’ll owe taxes on any earnings in the traditional IRA, but if the money is in cash, there won’t be much, if any, earnings. Anyone with earned income can contribute to a traditional IRA.
There’s always a chance the government can close the door on back door Roth IRA’s, but until they do, you might as well check it out with your tax advisor.