I was able to contribute to my roth IRA this week, thus eliminating goal number 1 from last week. It wasn't as straightforward as it is for most people, as I make too much income to regularly contribute to a roth, so I wanted to write about my experience doing it. I feel like this could serve as a guide for others who want to do the same thing.
So on Monday, I walked into my discount broker's office, and asked to open a traditional IRA, and then immediately convert it into my roth IRA. They seemed to understand what I wanted to do here, and I walked out of the office thinking "wow, that was easy." About 5 minutes after I left the office, the person who set up my account called me to ask how much I wanted withheld for tax purposes on the conversion. I said zero, as I explained to him that the contribution I made to the traditional IRA was non-deductible, and would be made with after tax dollars, therefore there was no need for withholding anything. He said he had never heard of doing that, so I told him I would check with my accountant and get back to him.
I then called my accountant. It took me about 30 minutes to explain to her what I wanted to do. She said she wasn't sure, but that she would look into it and call me back. About an hour later, I got a call from her saying that she had looked into it further, checked with some of her colleagues, and that yes, what I wanted to do was perfectly fine, and to go for it! I went back to the broker the next day and set everything up. On Friday morning, the money hit my roth IRA.
So to sum it up, to contribute to a roth when your income exceeds the limit:
1. Contribute to a traditional IRA.
2. Make the contribution non-deductible - to do this, you'll need to file form F8606 at tax time.
3. Convert this traditional IRA with the non-deductible contribution to the Roth. You've now contributed to your roth IRA even though your income is too high to do so normally.
** NOTE - if you have any previously existing traditional IRAs, this won't work. You cant just "choose" to convert the non-deductible IRA contribution to the Roth, if you have previously contributed to an IRA, you will only be able to convert a portion of the traditional IRA to a roth without tax implications. For example, if you do this and already have $5000 in a traditional roth, $2500 of your conversion will be from the non-deductible contribution, and $2500 will be from the previously created (and so far not taxed) traditional IRA, for which you will owe taxes on the conversion.
The only thing I'll say is that make sure you let your accountant know that you're doing this at some point. I knew this going in, but I'll need to file form F8606 to make the IRA non-deductible.Other than that, I think I'm all set to go. Be on the lookout for a post about what I buy with the money in my roth!
Doubt I will ever make enough to worry about my eligibility, but this is still good to know...amazing that accountants and brokers would be so confused by what you were trying to do, I thought they were the professionals?!...the Roth is awesome, even though I choose to use the Traditional, because it gives me a tax break I can use right away.
ReplyDeleteHi HYS,
DeleteYou know, I was sort of surprised by that lack of knowledge myself. I can understand it from the broker; its a discount brokerage that I use, and they don't like talking taxes, probably because they don't want to be accountable if they say something wrong. For my accountant, couple of things to consider though - sadly, the number of people that contribute to any sort of IRA is pretty low, and on top of that, the number of people making over the income limit that contribute is even lower, so its not something that comes up often. And this conversion thing is something that's pretty new, someone over the income threshold has only been able to contribute to a roth by this method since 2010.
Good for you for contributing to an IRA, its a great way to get your taxes down. If you can contribute to a 401k, it does the same thing if your looking for further tax breaks.