Advertisement
retirement

How High Earners Can Set Up a Roth IRA

It's simple: First contribute to a traditional IRA, then convert that IRA to a Roth.

Question: If I earn too much to contribute to a Roth IRA, can I still contribute to a traditional IRA and then immediately convert it to a Roth? Would I have to pay taxes on the conversion?

You have to pay taxes on the conversion, except for any part that’s from nondeductible IRA contributions. If this nondeductible IRA is your only traditional IRA, you’ll have to pay taxes only on any earnings in the account after you made the contribution and before you converted the money to the Roth. The entire conversion would be taxable if all the money in your traditional IRA was from tax-deductible contributions.

Advertisement - Article continues below

The calculation is more complicated if you have other money in IRAs. Your tax liability is based on the ratio of your nondeductible contributions to the total balance of all of your traditional IRAs (but not money already in Roths) when you make the conversion. This includes money in SEP and SIMPLE IRAs, says Jeffrey Levine, director of retirement education for Ed Slott & Co., which provides IRA advice. For example, if you have a total traditional IRA balance of $20,000 and $5,000 is from nondeductible contributions, then one-fourth of your conversion will be tax-free and three-fourths of the conversion will be taxed at your income-tax rate.

Advertisement
Advertisement - Article continues below
Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for paying estimated taxes, IRA or HSA contributions, and other deadlines, there's more to do by July 15 than just filing your feder…
July 14, 2020
What Time is the Tax Deadline Today?
tax deadline

What Time is the Tax Deadline Today?

If you're waiting until the last possible minute to file your tax return, at least know how much time you have.
July 15, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020

Recommended

Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
July 9, 2020
Avoid Blindly Following Random Benchmarks on the Road to Retirement
retirement planning

Avoid Blindly Following Random Benchmarks on the Road to Retirement

Unless the benchmark is relevant to your personal plan, it could steer you into taking a wrong turn.
July 8, 2020
Where Should You Retire?
retirement planning

Where Should You Retire?

This week, our Your Money's Worth podcast host Ryan Ermey interviews co-host Sandy Block about her recent story about the best retirement destinations…
July 7, 2020
Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020