Two years ago we wrote an article about how high income earners—who are generally excluded from Roth IRAs because of income levels—could still technically contribute to Roth IRAs if they used the right methods. We wrote that “high income earners could make non-deductible contributions to a Traditional IRA (non-deductible IRA), then take that money and move it into a Roth IRA.” This method allowed income earners access to the benefits of the Roth IRA, which notably are: the ability to grow your money tax-free and also make tax-free withdrawals.
Well, as of December 2015 it appears as though the option is still on the table, but it may not last much longer. Have you explored the backdoor Roth option with your financial advisor?
Congress May Determine the Future of the Backdoor Roth
Last December, Congress passed the Protecting Americans from Tax Hikes Act of 2015, which was also known as the ‘tax extenders legislation.’ There were a few tax planning provisions that Congress allowed to continue, like the state and local sales tax deduction and the American Opportunity Tax Credit for college. But for high income earners, one of the most unique was allowing the backdoor Roth IRA to continue.
If you’re married and you make between $184,000 - $194,000, you would typically be phased-out of contributing to a Roth IRA. But since there are no income limits for contributing to a Traditional IRA and the backdoor option is still allowed, you can potentially make the maximum Roth IRA contribution ($5,500 annually, or $6,500 if you're age 50 or older) by contributing to a Traditional IRA first and then converting it to a Roth after.
While the backdoor option remains open for now, there is certainly the possibility that Congress could legislate it away sometime this year and make it retroactively apply to all of 2016. But in an election year, it does not seem like it would be a high priority for Congress to do so (for either party). There is typically a legislative calm leading into a presidential election, as neither party wants to stir the pot too much and create any backlash. So, high income earners could still pursue this approach in 2016, but your time may be running out.
Contact a Wealth Manager at WrapManager to Discuss Your Options
Using the backdoor Roth method is not necessarily a clear cut process each time – there are certain stipulations that each retiree/investor need to adhere to. If you’re interested in the exploring the option as part of your investment plan, you should consult with a financial advisor before taking any action. One of our Wealth Managers would be happy to walk you through your potential options and evaluate your investment plan for you, to see if the option may make sense. Please reach out to us at 1-800-541-7774 or contact us here to speak with one of WrapManager's Wealth Managers.
The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.