The traditional Roth IRA comes with income limits that may prevent high earners from contributing directly. For instance, in 2024, single filers with adjusted gross incomes above $161,000 ($240,000 for married couples filing jointly) are ineligible for direct Roth IRA contributions. However, there exists a legal pathway, to make Roth contributions for high earners.
Here’s a simplified breakdown of how it works:
- Contribute to a Traditional IRA: Regardless of your income level, you can make a nondeductible contribution to a traditional IRA. Unlike deductible traditional IRAs, these contributions are made with after-tax dollars and are not tax-deductible.
- Convert to a Roth IRA: Once your funds are in the traditional IRA, you can convert them into a Roth IRA. This conversion is permissible because Roth conversions have no income limits. You can do this via a rollover within 60 days, or a direct trustee to trustee transfer.
- Tax Considerations: While the initial contribution to the non-deductible traditional IRA is made with after-tax dollars, any earnings in the non-deductible traditional IRA and the converted amount may be subject to taxes at the time of conversion. However, if you convert promptly after making the contribution and there are minimal earnings, the tax impact is typically negligible. Also, keep in mind that you must wait five years to take tax-free withdrawals from the Roth after a rollover, even if you’re already age 59 ½.
- Check IRA Pro-Rata Rule: If you have other traditional IRAs with pre-tax contributions, the IRS will apply the Pro-Rata rule, impacting the tax consequences of a conversion. Consult a tax professional to understand how these rules apply to your situation.
- Consult with a Financial Advisor: Given the complexities and potential tax implications, seeking guidance from a financial advisor or tax professional can ensure you navigate the process correctly and optimize the benefits of a Roth Conversion.
About John G. Ullman & Associates, Inc.
John G. Ullman & Associates, Inc., was founded in Corning, N.Y. in 1978. The firm is a Registered Investment Advisor (RIA) registered federally with the Securities & Exchange Commission*. As an independent, fee-based investment management firm JGUA provides comprehensive wealth management strategies and services to their clients. The firm manages over $1 billion in client assets, with a staff of more than 70 employees over four locations, including Horseheads, N.Y., Rhinebeck, N.Y., Charlotte, N.C. and Corning.
If you are interested in learning more about how JGUA could help you, visit our website HERE, or call 1 (800) 936-3785. You can follow us on, LinkedIn, Twitter, Facebook, Instagram, YouTube and The JGUA Blog.
*Registration does not imply a certain level of skill or training
