You have a small problem. You love the idea of a Roth IRA ó all those potential tax-free withdrawals and no required minimum withdrawals during your lifetime. Thereís a hitch, however: You and/or your spouseís income is too high to meet eligibility requirements. A Roth conversion strategy could be an option.
Eligibility for 2014 Roth contributions starts to phase out at a modified adjusted gross income of $114,000 and is completely eliminated at $129,000 for singles and between $181,000 and $191,000 for married couples filing jointly.
If you make too much to contribute to a Roth, a Roth conversion strategy may provide an option to enjoy the long term tax benefits of a Roth IRA. Hereís one possibility:
Step 1: Contribute to a nondeductible traditional IRA. You donít get a tax deduction for doing so, but thereís no income limit either.
Step 2: Convert to a Roth. Thereís no income ceiling for a Roth conversion, but you do have to pay taxes on any gains for the year you make the conversion. If there are no gains, there are no taxes owed since contributions are made with after-tax dollars. So, if you are going to convert, itís best to do it as soon as possible.
Step 3: Enjoy your new Roth. Your money will now be growing tax-free and youíll pay no income tax when you make qualified withdrawals.
Warning: If you have made any non-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.
State Farm agents do not provide tax, legal or investment advice.
A 10 percent tax penalty generally applies for withdrawals from tax-qualified products and/or non tax-qualified annuities before age 59Ĺ.