Explanation of how Roth conversions impact your income and whether they affect your eligibility to make Roth IRA contributions
To see the formula for calculating the Modified Adjusted Gross Income (for the 2021 tax year), look at page 39 of IRS Publication 590-A –
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DISCLAIMER: This video is only helpful hints and education. It is not specific tax, legal or investment advice. Before considering acting on anything you see in this video, first consult with your tax, legal or investment advisor. While the information expressed in this video is believed to be accurate, neither Andy Panko, CFP®, RICP®, EA nor Tenon Financial LLC make any guarantees to its accuracy….(read more)
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Roth conversions are a great way to take advantage of the many benefits of a Roth IRA. The conversion process involves moving funds from a traditional IRA to a Roth IRA. However, many people wonder if Roth conversions affect their ability to make traditional contributions to a Roth IRA.
Fortunately, making a Roth conversion doesn’t affect your ability to make contributions to a Roth IRA. You are still able to make regular contributions to a Roth IRA regardless of whether you have made a conversion.
It’s important to note that there is an annual contribution limit for Roth IRAs, which is currently $6,000 (or $7,000 if you are over 50 years old). This limit applies to all contributions, whether they are made through regular contributions or conversions. If you exceed this limit, you may be subject to penalties and taxes.
One potential benefit of making a Roth conversion is that it may help you save more money in the long run. While traditional IRA contributions are made with pre-tax dollars, Roth IRA contributions are made with after-tax dollars. This means that when you make withdrawals from a Roth IRA in retirement, you won’t have to pay taxes on your earnings.
It’s worth noting that Roth conversions do come with some tax implications. When you make a conversion, you will have to pay taxes on the amount of money being converted at your current tax rate. This could potentially result in a larger tax bill for the year in which the conversion is made. It’s important to consult with a financial advisor or tax professional before making a Roth conversion to ensure that it makes sense for your individual financial situation.
In conclusion, making a Roth conversion does not affect your ability to make contributions to a Roth IRA. You are still able to make regular contributions up to the annual limit. While Roth conversions may offer some benefits, they also come with tax implications, so it’s important to carefully consider whether a conversion makes sense for you. Ultimately, the best approach will depend on your individual financial goals and circumstances.
Thank you Andy. I'm no longer working. If I "Grossed" just over $11,000 this year, and $3,500 was deducted pre-tax for 401K, would I be able to still contribute the full $7,000 to Roth? I would have small earned interests from investments, but I don't know if those will count towards MAGI. Thanks.
Thank you! I had much confusion on this point and most articles online did not clearly address it.
Thank you very much for this. So it sounds like even if my conversion might cause my income to go over the amount of income you can have to contribute to a Roth, that I can still contribute to a Roth. However, my understanding is also that the Roth will count as part of your MAGI for purposes of calculating whether you have to pay extra Medicare under IRMAA. Do you have any videos on that?
Thank you for the information!… I blew it, did a large Roth conversion and just figured that I was over the limit around 205,000 and pulled back my contribution for 2021, thinking I went over. Question did an ESA contribution for my kids and pulled that out also when I went over, could I have left that in also?
I think there's a catch-22 that your in-plan Roth 401(k), Roth 403(b), or Roth 457(b) conversion do impact your ability to do a direct Roth IRA contribution. It's only the Roth IRA conversion that do not impact your ability to do a direct Roth IRA contribution.
Short and to the point.
May we get a read out on the dozen or so books in your mini library shelf behind you?
When I read the headline question, I thought this was a question for an early retiree or someone else not working, and whether the converted amount taxed as ordinary income would also count as earned income for the purposes of qualifying for a Roth IRA contribution. (That answer is also No.)