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Tom Limoges

February 21 , 2017

IRA Income Restrictions? Consider the Backdoor

IRA Income Restrictions? Consider the Backdoor

Over the last several weeks I have received questions from clients who are looking to maximize retirement savings but are limited in options based on the Internal Revenue Code income restrictions. IRAs and Roth IRAs both offer unique tax benefits for retirement savers. Traditional IRA contributions have the potential to reduce income taxes in the year for which they are made (taxpayers have until the Federal tax deadline to make the applicable contributions for the year in question). Income generated from IRAs is taxed in the year when withdrawals are taken, traditionally in retirement. Roth IRA contributions are made “after tax” meaning invested funds go into the Roth IRA on previously taxed income from the taxpayer(s). Therefore, distributions at normal retirement age are tax-free. The Internal Revenue Code imposes restrictions to both of these IRA accounts at certain income levels. For those in this situation, there is a solution – the Backdoor Roth IRA.

While the name “Backdoor Roth IRA” sounds suspect, it is allowed by the Internal Revenue Code and widely used. The Backdoor Roth IRA process converts a non-deductible IRA into a Roth IRA – allowing high-income earners the ability to make Roth IRA contributions. A Non-deductible IRA is subject to the same rules and contribution limits as the Traditional IRA without the benefit of the federal tax deduction. After certain income thresholds and the availability of a work-sponsored retirement plan, the annual IRA deduction sunsets. After the sunset, contributions can still be made on a non-deductible basis. It is this portion that can be converted into a Roth IRA tax free.

Please beware, not everything is as easy as it may sound. There are specific tax rules set forth by the Internal Revenue Code for savers with established IRAs wanting to convert non-deductible IRAs to Roth IRAs that could require the advice of a CPA or financial advisor. Also, there are other options when looking to maximize your retirement savings while lowering your tax bill, such as maximizing an employee sponsored 401(k) plan and/or maximizing HSA accounts (if available).

Make no mistake about it tax day is approaching!! These are all good topics to discuss with a CPA or financial advisor. If there are any questions/concerns on opening these accounts, please contact your Security National Bank Wealth Management advisor.    


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