If you’re thinking that Roth IRA won’t work for you because of your earnings, think again. If you are a high-earner, or entrepreneur wanting to take advantage of the opportunity for tax free retirement, there are many strategies that will legally allow you to slip through the loophole and start your Roth IRA retirement today.
A Roth IRA is essentially a savings account that allows you to save after-tax, non-deductible money for retirement. Roth IRAs are sought-after because they provide tax-free growth on your assets, and tax-free retirement withdrawals. With the looming evidence that income tax will continue to rise, tax-free retirement withdrawals could be the best thing for you and your family. If your income surpasses $131,000 as an individual the capacity to add directly to a Roth IRA ends, essentially ending any Roth IRA opportunities for people in this high bracket. Fear not! There are few options for legal, alternative ways to contribute to a Roth IRA.
1 – 401(k) contributions to Roth IRA rollover.
In 2015 the IRS says you can now turn your after tax 401k into a Roth IRA. If your 401(k) allows after-tax additions and likewise gives the chance to withdraw the additions you may make the maximum addition before and after taxes, then withdraw these contributions each year to rolled into a Roth IRA. Keep in mind you still have the option to pay taxes on this rollover the year of the contribution, or the year of withdrawal. Make sure to speak with an investment specialist to go over any caveats that might be associated with this due to individual circumstances.
2 – SEP-IRA to Roth IRA conversion.
Are you a small business entrepreneur or self-employed professional? A SEP-IRA could be the investment for you. To a small business owner, this type of investment is valuable because you can still choose where your investment is headed, while contributing more than the traditional Roth IRA limit. To top it off, you can still contribute to your 401(k) without is affecting either the 401(k) or the SEP-IRA. Keep in mind that these two must be separate, and not under common control of one employer. To make this work you would simply contribute your maximum amount to a SEP-IRA in the current tax year and receive the current tax benefit. Then in the next year, convert the SEP-IRA to a Roth IRA and pay taxes on that conversion in the same year. There is virtually no limit to how often you could repeat this, as long as your tax bracket does not change.
3 – Traditional IRA to Roth IRA transfer.
The most popular and straightforward approach is to add the yearly limit to a traditional IRA and transfer those additions to a Roth IRA. To make this work you have to meet the requirements of being less than seventy years old, and have a track-able income. Keep in mind that if you are a high-earner the chances taking a deduction from this contribution is slim to none. As of 2010 high-income earners can contribute to a Roth IRA in this manner without tax liability. To implement this you would add the maximum contribution to a traditional IRA in the current tax year, then convert the account to a Roth IRA in the next tax year. If you did not use a deduction then this process will be tax-free, if you did take a deduction be ready to pay taxes for this conversion.
It is wise to always speak with an investment professional before setting out to convert your high-income investments. If you are interested in Roth IRA conversion strategies contact CIC Wealth today!