Tues, DEC 20th, 2011
Evaluating your investment options is critical to financial success. Below, Albion Wealth Advisor Devin Pope explores a strategy that could prove beneficial; a strategy that many may not even know exists. Jason Ware Market Strategist, Analyst (801) 487-3700; (877) 487-6200
============ Wealth Advice: Can High Income Earners Fund Roth IRAs?
The Roth IRA is a powerful investment tool for investors. The assets in the Roth IRA grow tax deferred and qualified distributions are free of tax. Having a bucket of Roth IRA funds makes sense for almost any investor. The issue is there are restrictions to be able to fund the Roth IRA. For instance, individuals that earn over $125,000 and couples that make more the $183,000 in 2012 cannot fund the Roth IRA. Also, prior to 2010 investors could only convert IRA assets to a Roth IRA if their modified adjusted gross income [MAGI]was below $100,000. In 2010, the $100,000 modified adjusted gross income [MAGI] limit was eliminated opening the door for all income earners to convert IRA assets to a Roth IRA.
Determining whether it makes financial sense to convert IRA assets to a Roth IRA is specific to each individual or family. But, the option to move funds into a Roth IRA for those investors who earn above the aforementioned income thresholds is available. If [and this is an important if] the investor doesn’t currently have any IRA assets they could make a non-deductible IRA contribution and then convert that contribution into a Roth IRA in the very same day. With this strategy you do not get a deduction for the IRA contribution but you also do not have to pay any taxes on the Roth conversion. This strategy allows high income earners to build up their Roth IRA financial bucket.
One caveat, if you currently have IRA assets this strategy may not be effective because the IRS uses a pro rata rule in determining non-deductible IRA assets and deductible IRA assets when completing a conversion. In other words, you can’t cherry pick the assets you want to convert to your Roth IRA.
For more information about this Roth IRA strategy please contact Albion Financial Group. Further, we recommend that you consult your tax advisor to determine if this is the best way to build your Roth IRA financial bucket. Devin B. Pope, CFP®, MBA firstname.lastname@example.org