Little Known ROTH Conversion Requirements
· Non Deductible IRA Tax Deferred Income Growth ·
Colleyville Financial Planning Tips
Most of us have heard of Traditional IRA’s and Roth IRA’s as tools for tax free or tax deferred income growth.
Less well known are the benefits and rules regarding Non Deductible IRA’s – which can also be a valuable tool for retirement savings.
What is a Non-Deductible IRA
Like a Traditional IRA, there are no maximum income limits on who can contribute to a Non Deductible IRA. But there is a minimum income level: you cannot contribute more to this IRA than you earn.
And, as the name indicates – this type of IRA cannot be deducted from your income for a tax benefit. The same withdrawal rules apply to the Non-Deductible IRA as to the Traditional IRA. So you must be 59 ½ for money to be taken out penalty free. When money is taken out of the Non-deductible IRA, taxes are paid on the gains from the investments.
Roth IRA Conversion
While the most obvious benefit of a Non-Deductible IRA is the tax deferred earnings – another thing to consider is using it as a precursor to a Roth IRA conversion. There are no longer income limits on those wishing to convert traditional IRAs to Roth IRAs. Roth IRAs are an especially attractive retirement vehicle since the earnings grow tax free.
This can be a valuable tool especially if you don’t currently have any IRA’s. To convert a Non-deductible IRA to a Roth, taxes must be paid on any earnings in the Non-Deductible IRA. If there are no earnings, no taxes are paid.
This is referred to as a “backdoor Roth”. However, if you have an existing traditional IRA, form 8606 must be completed at tax time. Taxes may be owed on a portion of the converted IRA – depending on how much is in the existing traditional IRA. In this situation, it is advisable to review your particular situation and evaluate if it is in your best interest to convert.
Non-deductible IRAs and “Catch Up” Contributions
Who should consider a Non-deductible IRA? High Income earners who have already maxed out their retirement contributions to a company 401k and Health Savings Accounts and who are looking for additional tax deferred savings. For these individuals, $6000 can be contributed annually or if you are over 50, you can make a “catch up” contribution of $1000 for a total contribution of $7000 annually.
Colleyville Financial Planner
If you don’t have any other traditional IRAs, this is a no-brainer. If you do have an existing traditional IRA, you may wish to consult your Financial Advisor or Accountant before proceeding.
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