Can You Fund a Roth IRA?
One of the biggest misconceptions perpetuated by investment
advisors is that you cannot contribute into a Roth IRA. While some
steps need to be taken to make sure this is done properly and nonbusiness
owner taxpayers may need to calculate the cost-benefit of an
initial taxable conversion, every taxpayer can fund a Roth IRA, either
directly or indirectly. taxpayers can make contributions directly
into a Roth IRA if their Modified Adjusted Gross Income (MAGI)
is below $118,000 (single) or $186,000 in 2018 (married). Higher
income taxpayers can make indirect, or “back door” contributions to
a Roth IRA.
Under this approach, the taxpayer and spouse make the maximum
annual contribution ($5,500 per spouse if under age 50; $6,500 per
spouse if age 50 or older) into a non-deductible IRA and thereafter
convert those contributions into a Roth IRA. This conversion is
tax-free if handled as discussed below. Taxpayers who follow our
recommended strategies for Roth IRA conversions can achieve
federal income tax savings of over $500,000 as shown on the next
page. With potential savings of this magnitude, it’s imperative that all
taxpayers take maximum advantage of Roth IRAs.
Maximizing Tax-Free Roth
Conversions
Most taxpayers have one or more IRAs that contain not only aftertax
IRA contributions, but also earnings and rollovers from prior
retirement plans. Despite the fact that many taxpayers use Simple
IRAs or SEP IRAs in their businesses, both of these accounts are
IRAs by definition and will create tax issues if a conversion is
attempted without rolling these assets into a 401(k), or another type
of retirement plan. We routinely help clients reach tax-free Roth
conversions by using the following five-step process:
Calculate the cumulative amount of after-tax
contributions that have been made to the taxpayer’s
IRA. Tax laws require taxpayers to keep a running
record of their non-deductible IRA contributions
and report them to the IRS on Form 8606 attached
to their annual federal income tax return. If the
taxpayer lacks these records, he or she may be
able to obtain this information from the current
investment advisor managing the IRA. Otherwise,
the taxpayer must simply estimate his or her prior
non-deductible contribution(s).
A Roth IRA is one of the
best legacy assets to
leave to children.
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8 March 2018 • FLocal Magazine
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