June 23, 2015
Opening the “Back Door” to a Roth IRA
Posted by Armanino Estate & Trust Tax Team
A potential downside of tax-deferred saving through a traditional retirement plan is that you’ll have to pay taxes when you make withdrawals at retirement. Roth plans, on the other hand, allow tax-free distributions; the tradeoff is that contributions to these plans don’t reduce your current-year taxable income.
Unfortunately, modified adjusted gross income (MAGI)-based phaseouts may reduce or eliminate your ability to contribute:
- For married taxpayers filing jointly, the 2015 phaseout range is $183,000–$193,000.
- For single and head-of-household taxpayers, the 2015 phaseout range is $116,000–$131,000.
You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
If the income-based phaseout prevents you from making Roth IRA contributions and you don’t already have a traditional IRA, a “back door” IRA might be right for you. How does it work? You set up a traditional account and make a nondeductible contribution to it. You then wait until the transaction clears and convert the traditional account to a Roth account. The only tax due will be on any growth in the account between the time you made the contribution and the date of conversion.
Business owners and high net worth individuals often come to us hoping to reduce their tax burden. To make that happen, we first need to understand your short- and long-term goals. Since the tax decisions you make today can affect everything from your ability to expand your business to your plans for retirement, it’s critical for us to know what you have in mind for your company, your family and yourself.