How to ROTH IRA at Any Age or Income

Dan Zajac, philadelphia financial advisorROTH IRAs can be a fantastic part of any financial plan. In fact, they can be a good fit for savers both young and old, pre-retirees and retirees, and low and high wage earners.

This is because ROTH IRAs aren’t a one-size-fits-all model. They have features that can benefit any age and any demography.

But yet, many are unaware of the tax-free income features of ROTH IRAs and exactly how or where they fit into a financial plan. Furthermore, they lack the expertise to know how to get dollars into a ROTH.

Because while contributions from earnings may continue to be the most commonly understood method for contributing to a ROTH, it is far from the only option.

In this blog post, we’ll explore four options for those seeking to contribute dollars into a ROTH IRA.

1 – Contribute Based on Earnings

Any individual, of any age, can establish and contribute to a ROTH IRA as long as they have earned income (or earned income of a spouse).

However, a ROTH IRA does impose an eligibility restriction based on earned income. Specifically, restrictions to contributions to a ROTH IRA apply when AGIs (adjusted gross incomes) reach the following:

  • Single filers: $117,000 to $132,000
  • Joint filers: $184,000 to $194,000

For those below the AGI limits, a full contribution is allowed. For those between the limits detailed above, a phase-out occurs (meaning they can contribute some, but not the full amount). If you are over these limits, no contribution is allowed.

The maximum allowable contribution to a ROTH IRA is $5,500 per person per year. If you are 50 years old or above, the IRA allows for an additional $1,000 contribution, for a total of $6,500 per year.

Burst of Knowledge – Ask your accountant how much you can contribute to a ROTH IRA. Contributions are calculated by calendar year and you are allowed to contribute for the previous year until you finalize your tax return. 

2 – ROTH 401(k)

Since 2006, employers have been allowed to add a ROTH 401(k) component to their employer-sponsored retirement plans.

This provision allows employees to contribute up to $18,000 per year into a ROTH 401(k), without any regard for other income and contribution limits associated with ROTH IRAs as discussed above.

It’s equally important to note that employer-sponsored retirement plans are often the first experience pre-retirees have with saving. That’s because it’s usually easy to do. It’s often hands-off, as the money is contributed directly from payroll into the plan. In a simple sense, this may mean that ROTH 401(k)s will be utilized as a retirement savings vehicle in greater numbers than the more traditional ROTH IRA.

This provision has been a game changer for the retirement industry. In fact, the ability to contribute over three times the previously allowable amount has enabled retirees to potentially create substantial wealth in a ROTH account—something that was more difficult to do prior to the provision.

Burst of Knowledge – Employer contributions, including match and profit share, will always be directed into a pre-tax (non-ROTH) account.    

3 – ROTH Conversion

Many tax aware and tax savvy investors use a ROTH IRA as part of their retirement plan. The tax-free income feature of ROTH accounts makes them extremely valuable during the distribution phase of retirement. Additionally, the fact that ROTHs are not subject to RMDs makes them even more attractive.

For these reasons and others, it’s not uncommon for those seeking to plan for the future look to a ROTH conversion. A ROTH conversion takes pre-tax IRA dollars and converts them to after-tax ROTH dollars.  The conversion is a taxable event.

However, all future growth and future distributions from the converted ROTH will be tax-free income.  This is tax-free income to the retiree during their lifetime AND tax-free income to the beneficiaries upon inheritance.

Burst of Knowledge – Until 2010, anyone making more than $100,000 per year was ineligible for a ROTH conversion. Now anyone, of any income, can convert an IRA into ROTH IRA.

4 – Backdoor ROTH IRA

The fourth option for those seeking to contribute to a ROTH IRA may be a backdoor ROTH. This is also the most complicated option.

A backdoor ROTH IRA is completed by making a non-deductible contribution to a traditional IRA. With a non-deductible IRA contribution, the person making the contribution receives no immediate tax deduction (as is typical with an IRA contribution). Furthermore, the IRA has “basis.”

After making the non-deductible contribution, the participant immediately converts the traditional IRA into a ROTH IRA. Upon conversion, the only portion of the conversion that is taxable is the gain over the basis.

This backdoor contribution and subsequent conversion is a way around the income limits associated with a regular ROTH IRA contribution.

Burst of Knowledge – There are several other key rules that need to be followed to be sure this works. I encourage you to discuss with an expert.

What Now?

There are several ways to get dollars into a ROTH IRA. They are no longer only for those making below the requisite income limits. Additionally, those seeking tax-free income later may be encouraged to take a second look.

In fact, ROTH IRAs can be a fantastic part of any financial and retirement plan. Just as we talk investment diversification*, having tax diversification in the form of tax-free, tax-deferred, and taxable dollars in retirement can help lead to increased planning opportunities.

Contributions to a Roth IRA are not tax deductible and there is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Roth IRAs are available only to single-filers making up to $132,000 or married couples making a combined maximum of $194,000 annually. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).

Tax services are not offered through, or supervised by Lincoln Investment, or Capital Analysts. None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.

*Diversification does not guarantee a profit or protect against a loss.

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