So you want to contribute to a Roth IRA, but you make too much money, and your employer doesn’t offer a Roth 401(k) eh? If your Adjusted Gross Income (AGI) is higher than $110,000 (or $173,000 if married), you can’t contribute directly to a Roth IRA for 2012. But what if you REALLY want to contribute to a Roth IRA? There IS a way!

Non-deductible Traditional IRA contributions allow high income earners to get some of the tax benefits of IRA’s, but not all of them. Money put into a Traditional IRA is normally tax deductible, grows tax deferred, and is taxed when you take the money out in retirement. As the name suggests, non-deductible IRA contributions don’t give you a tax deduction, however the money grows tax deferred, and only the growth is taxable when you take it out in retirement.

Roth IRA’s are not tax deductible either, but the growth is never taxed! You can see why someone would much rather have money in a Roth IRA as opposed to having non-deductible IRA contributions… huge tax savings on the growth! This is why many people would want to convert their non-deductible IRA contributions to a Roth IRA.

As recently as 2009, you could only convert an IRA to a Roth IRA if your income was below $55,000 ($89,000 if married). But in 2010, those limitations were eliminated so now there are NO income limits on IRA conversions.

So if you want to put money into a Roth IRA, but make too much money, here’s what you can do:
Step 1: Open new Traditional IRA
Step 2: Make a non-deductible contribution to your IRA (Maximum of $5,000 for 2012, $6,000 if over 50)
Step 3: Open new Roth IRA
Step 4: Tell the custodian of your IRA that you want to do a Roth conversion

That’s it! Plus, you can do this for each you and your spouse… There are a couple of things to remember when doing the conversion:

After contributing to the non-deductible IRA, wait at least 30 days before converting to the Roth IRA. Some experts recommend waiting until the next year. This helps establish a paper trail of the conversion.

Be sure to open a new Roth IRA for the conversion. If the IRS calls the conversion into question, the entire Roth IRA might lose its preferred tax status. You don’t want to expose your current Roth IRA to this risk.

Don’t forget to file Form 8606 with your tax return. If the IRS ever comes calling, you need to be able to prove that you contributed to a non-deductible IRA. Form 8606 is the proof you MUST have.

Be sure you consult with a financial advisor and/or an accountant before implementing this strategy, especially if you have a Traditional IRA as you may expose yourself to additional taxes.

So what do you think? Thinking about implementing this strategy? Let me know your thoughts or questions!…(read more)

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If you have a non-deductible Individual retirement account (IRA) and want to convert it to a Roth IRA, there are a few steps and considerations to keep in mind. Converting a non-deductible IRA to a Roth IRA can offer potential tax advantages and the opportunity for tax-free growth of your retirement savings. Here’s how to do it:

1. Understand the Basics: Before you begin the conversion process, it’s important to understand the basic differences between a traditional non-deductible IRA and a Roth IRA. A non-deductible IRA is funded with after-tax dollars, meaning you don’t get a tax deduction for your contributions. On the other hand, a Roth IRA allows for tax-free withdrawals in retirement, provided certain conditions are met.

2. Check Your Eligibility: Not everyone is eligible to convert a non-deductible IRA to a Roth IRA. High-earners may not be eligible to contribute directly to a Roth IRA, but they can still convert a non-deductible IRA to a Roth IRA. It’s important to consult with a financial advisor or tax professional to ensure you meet the eligibility requirements.

3. Consider the Tax Implications: When you convert a non-deductible IRA to a Roth IRA, you will need to pay taxes on any pre-tax contributions and earnings that have accumulated in the account. This can result in a significant tax bill, so it’s important to consider the tax implications before proceeding with the conversion.

4. Complete the Conversion: To convert a non-deductible IRA to a Roth IRA, you will need to contact your financial institution or brokerage firm and request a conversion form. Once you have completed the necessary paperwork, the funds from your non-deductible IRA will be transferred to a Roth IRA account.

5. Pay the Taxes: As mentioned earlier, you will need to pay taxes on the converted amount. Depending on your individual circumstances, you may choose to pay the taxes from a separate source of funds or have the taxes withheld from the converted amount. Again, it’s crucial to consult with a tax professional to determine the best approach for your situation.

6. Understand the 5-Year Rule: After completing the conversion, it’s important to be mindful of the 5-year rule for Roth IRAs. This rule stipulates that you must wait at least 5 years after the conversion to withdraw any earnings from the Roth IRA tax-free. It’s a good idea to familiarize yourself with this rule and plan your withdrawals accordingly.

Converting a non-deductible IRA to a Roth IRA can be a smart move for many individuals, but it’s important to carefully consider the tax implications and eligibility requirements before making the conversion. Consulting with a financial advisor or tax professional can provide valuable guidance and ensure that you make the most informed decision for your retirement savings.