Unlock Tax Savings With a Backdoor Roth IRA

Don't give up quickly if your path to contributing to a Roth IRA is blocked by tax law limits. Despite the obstacles, upper-income taxpayers may be able to take advantage of a backdoor Roth IRA.

IRA contribution basics

Unlike a traditional IRA where contributions may be wholly or partially tax-deductible, contributions to a Roth can never be deducted, but future distributions are generally exempt from tax. In contrast, traditional IRA distributions may be taxable in full.
 
The contribution limit for any combination of traditional and Roth IRAs for the 2018 tax year is $5,500 (increased to $6,000 for 2019). Plus, you can add on $1,000 if you're 50 or older.
 
But there are no income limits on taxpayers who contribute to traditional IRAs. With a Roth, the ability to contribute is phased out, based on your modified adjusted gross income (MAGI).

1. For the 2018 tax year, the phaseout for single filers occurs between $120,000 and $135,000 of MAGI ($122,000 to $137,000 for 2019).

1. For the 2018 tax year, the phaseout for joint filers occurs between $189,000 and $199,000 of MAGI ($193,000 to $203,000 for 2019).

Conversions and backdoor Roth IRAs
 
Of course, you can convert an existing traditional IRA to a Roth, but you must pay tax on the conversion at ordinary income rates. Currently, the top rate is 37 percent.
 
However, this clever tax technique may work for you: Fund a traditional IRA with nondeductible contributions. Then, when you convert to a Roth, you only pay tax on the portion representing taxable earnings. The bulk of the conversion is tax-free. This "back-door IRA" approach remains viable after recent tax legislation.
 
There are additional complications if you already have other IRAs. But you may be able to minimize the tax damage by rolling over those funds into a 401(k) or other plan.
 
Call before you make your move, or if you have questions about your IRA tax obligations.

"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.   
 
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For more free resources, such as Tax Rates, Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Monarch Accounting Group, Inc
145 Tower Drive, Suite 4
Burr Ridge, IL 60527
Phone (630) 320-3720
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