Despite fears several years ago that this loophole might be closed, you can still take advantage of the "Backdoor Roth IRA."

Backdoor Roth IRA

A Roth IRA can be a particularly attractive device because, unlike a traditional IRA, neither the funds nor the growth thereon are taxed upon withdrawal. Also, there are no required minimum distributions during the lifetime of the contributor. After death, the distributions are based on the beneficiary's life expectancy as with traditional IRAs. In order to contribute to a Roth IRA, a taxpayer may not have modified adjusted gross income above a certain level. For a single taxpayer, the ability to contribute to a Roth IRA is phased out beginning at $116,000 until it is gone entirely at $131,000 ($183,000 and $193,000 if married filing a joint return). The limits on Roth IRAs have been in the law, adjusted for inflation, from the inception. However, since 2010 the income limits for converting traditional IRA to a Roth IRA have been removed. Thus, a taxpayer who wants a Roth IRA but earns over the limit can now make a contribution to an IRA and then convert the IRA to a Roth IRA.

If your income is too high to make a Roth IRA contribution and you are covered by a retirement plan at work, you cannot make a deductible IRA contribution. But you could still make a contribution to a non-deductible IRA and then convert the non-deductible traditional IRA to a Roth IRA. Normally, when you are converting a traditional IRA to a Roth IRA, you must pay tax on the balance of the IRA because you took a deduction when you made the original contribution. However, there is no such downside when you've made a contribution to a non-deductible IRA because you never got a deduction. Thus, this is a great way to get money into a Roth IRA for those earning too much to make the contribution directly to a Roth IRA.

This can be a powerful vehicle for savings and investing since it is never income taxed. However, your time to take advantage of this strategy may be running short.

If you have any questions about this topic, please contact the Goralka Law Firm at (916) 440-8036.