Multi part question, still learning about IRAs, taxes and how all this works.
My wife and I file jointly. We will be bringing in probably around 185k gross this year. We both have employer 401ks. From what I’m reading since we make over 123k or so, we will not be able the deduct any money that we put into our traditional IRAs, is that correct?
Secondly, can you just move money from a traditional IRA over to a Roth IRA with no penalties instead as I’m guessing there would be no point in doing a Traditional IRA if you can’t deduct it.
Just want to make sure I’m not going to get any fees or extra taxes since this is money I’ve already paid taxes on in our paychecks.
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Answers & Comments
Verified answer
As a married couple with AGI of $185k you can still contribute directly to a Roth IRA.
You can contribute to a traditional IRA, but you don't get a deduction for it, which just means you are contributing after-tax dollars. You aren't getting double taxed. This is called a non-deductible IRA.
In your situation you might as well put the money in a Roth IRA. Either way you aren't going to get a tax deduction this year for your contribution (which means you're contributing post-tax dollars) but with the Roth account any future growth on your investments is tax free.
If your income goes up and you end up exceeding the limits for contributing directly to a Roth, you can still contribute to a non-deductible IRA, then convert it to a Roth account. This is called a backdoor Roth.
For a while there was some controversy over whether or not this was legal and/or ethical, since it appears to be a loophole that allows wealthy individuals to bypass the limits that are intended to prevent them from investing in Roth IRA's, but the IRS has released statements in recent years confirming that this practice is allowable under tax law.
For what its worth, at your income level you really should just pay for professional investment advice once or twice per year. The $100 you'd spend for an hour of advice from a professional could save you $10,000 or more in taxes or added value in retirement.
Bob,
While you may be in an income bracket which doesn't allow for IRA deductions you most likely can still complete a backdoor IRA. This is when you put the money first into a traditional IRA and later transfer the money to a Roth IRA. This will benefit you in the future when you are withdrawing the money because it will not be taxed on the way out. Roth's also don't require minimum distributions so you can leave in as long as you desire or pass it to a beneficiary as a tax free death benefit.
I agree with the previous reply that it may make sense in your income level to consult a financial advisor. As your financial situations grows and becomes more complex you will receive more benefit by working with professionals rather than doing it on your own.
Matt Stratman
https://www.southbayplanning.com/
The money you have withheld from your paychecks doesn't mean you've paid the taxes - it's just a deposit on what you'll owe when you file your return for the year.