December 14, 2014

What is the “backdoor” IRA that can be used for high income people when their income is too high for a regular IRA?

2 thoughts on “December 14, 2014”

  1. Garrett Haag says:

    Married couples earning $191,000 or more and singles earning $129,000 or more in 2014 are barred from contributing directly to Roth IRAs. With a Roth IRA, contributions are made with after-tax dollars, but earnings compound without tax and can be withdrawn tax-free in retirement. With a traditional IRA, in contrast, qualifying savers get an upfront tax deduction but owe tax when money is withdrawn. Most high earners who can’t contribute directly to a Roth also can’t make a deductible IRA contribution. For instance, there’s no deduction if you are covered by a retirement plan at work and have 2014 income of at least $116,000 on a joint return or $70,000 as a single filer. So for those investors, a traditional IRA is ho-hum. The high earners are still allowed to contribute to a traditional IRA, and that’s the first step in the indirect route to a Roth IRA. The next step, which might occur as soon as a few days later is to convert that traditional IRA to a Roth, which is a move available to all. This will cause some tax liability due to the conversion so be careful with that.

  2. Mike Finley says:

    That was an outstanding answer, Garrett! Here is a video that explains the matter in detail:

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