What is a Roth conversion and is it for you?
Is your household income too high to be eligible for a Roth IRA? Find out more about a Roth conversion strategy.
If you love the idea of investing in Roth IRAs with the tax free withdrawals but find that you and/or your spouse make too much money to contribute*, there could be another answer. A Roth conversion strategy may provide an option to enjoy the long term tax benefits of a Roth IRA. Here's how it works:
- Make a nondeductible contribution to a Traditional IRA. You don't get a tax deduction for doing so, but there's no income limit either.
- Then convert the Traditional IRA to a Roth IRA. There's no income ceiling for a Roth conversion, but you do have to pay taxes on any gains for the year you make the conversion.
That's it. Enjoy your new Roth IRA. Your money will now be growing tax-free and you'll pay no income tax when you make qualified withdraws. Visit the IRS website or talk to your tax advisor for more information.
Warning: If you have made both non-deductible and tax-deductible IRA contributions, the Pro-Rata Rule requires all IRAs to be treated as one, including traditional, SEP and SIMPLE IRAs. Under these circumstances, it is not possible to convert after-tax (non-deductible) contributions without income tax consequences. You should always consult with your tax, legal and investment professionals before making investment decisions. This is especially true if you would like to consider using the Roth conversion technique described in this article.
*Eligibility for 2020 Roth IRA contributions start to phase out at a modified adjusted gross income of $124,000 and is completely eliminated at $139,000 for singles and between $196,000 and $206,000 for married couples filing jointly. Eligibility for 2021 Roth IRA contributions start to phase out at a modified adjust gross income $125,000 and is completely eliminated at $140,000 for singles and between $198,000 and $208,000 for married couples filing jointly.