{"id":28679,"date":"2012-03-29T10:42:40","date_gmt":"2012-03-29T14:42:40","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/03\/29\/stiff-arm-the-taxman-with-a-backdoor-roth-ira\/"},"modified":"2012-03-29T10:42:40","modified_gmt":"2012-03-29T14:42:40","slug":"stiff-arm-the-taxman-with-a-backdoor-roth-ira","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/03\/29\/stiff-arm-the-taxman-with-a-backdoor-roth-ira\/","title":{"rendered":"Stiff-Arm the Taxman with a Backdoor Roth IRA"},"content":{"rendered":"<div align=\"left\"><script type=\"text\/javascript\">\ntweetmeme_style = 'compact';\n<\/script><br \/>\n<script type=\"text\/javascript\" src=\"http:\/\/tweetmeme.com\/i\/scripts\/button.js\"><\/script>\n<\/div>\n<div><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-28586 \" title=\"Stiff-Arm the Taxman with a Backdoor Roth IRA\" src=\"http:\/\/www.investmentu.com\/wp-content\/uploads\/2012\/03\/backdoor-roth-ira.jpg\" alt=\"Stiff-Arm the Taxman with a Backdoor Roth IRA\" width=\"220\" height=\"220\" \/><\/p>\n<p>Highly compensated earners still can\u2019t make annual contributions to Roth IRAs \u2013 directly. However, 2010 gave them a loophole\u2026<\/p>\n<\/div>\n<p>The origins of the Roth IRA go back to Newt Gingrich\u2019s takeover of Congress back in 1994 and the \u201cContract with America,\u201d where it was called the American Dream Savings (ADS) Account.<\/p>\n<p>Unfortunately the plan was vetoed and never set into motion. However, two years later the Taxpayer Relief Act of 1997 was passed and allowed people to contribute to a Roth IRA plan for the first time ever in the year 1998. The new plan allowed workers to contribute after-tax dollars and have it grow tax deferred until they\u2019re eligible to withdraw the money tax free.<\/p>\n<p>The plan also came with two more benefits. Anyone who contributes to an IRA can roll it over to a Roth IRA, and the plan uses the current year\u2019s income to determine eligibility of contribution or rollover.<\/p>\n<p>However, many individuals were prevented from participating in the Roth IRA because of the stringent qualification requirements. The legislation decreed \u201chighly-compensated\u201d workers couldn\u2019t contribute to Roth IRAs.<\/p>\n<p>Was this Bill Clinton\u2019s way of claiming a possible tax break for the middle class from this Republican legislation? That\u2019s another article\u2026<\/p>\n<p>Anyway, let\u2019s fast-forward to the present. Highly compensated earners still can\u2019t make annual contributions to <a title=\"Traditional IRAs vs. Roth IRAs\" href=\"http:\/\/www.investmentu.com\/retirement-planning\/traditional-iras-vs-roth-iras.html\">Roth IRAs<\/a> \u2013 directly. However, 2010 gave them a loophole\u2026<\/p>\n<p>Two years ago, Congress allowed for the expiration of the $100,000 adjustable gross income (AGI) limit on Roth IRA conversions. This ended income limits on Roth conversions while leaving income limits on contributions in place. In effect, this change enabled anyone (regardless of income) to convert and\/or contribute to a Roth IRA.<\/p>\n<h2><strong>Why Should I Care Now?<\/strong><\/h2>\n<p>Here are few reasons why converting to a Roth may be good for you:<\/p>\n<ol>\n<li>Roth contributions are made with after-tax money, but the earnings and all withdrawals in retirement are tax-free. So, a Roth provides a big tax break on the back end that a <a title=\"Your Individual Retirement Account (IRA): Resolutions for Wealth &amp; Happiness\" href=\"http:\/\/www.investmentu.com\/2008\/December\/your-individual-retirement-account.html\">traditional IRA<\/a> does not.<\/li>\n<li>Roth withdrawals aren\u2019t included in determining how much of a retiree\u2019s Social Security check is taxed under current law. Nor is how much in extra income-based Medicare premiums he\/she has to pay.<\/li>\n<li>You must start taking minimum required distributions from a traditional IRA\u2008when you turn 70 and a half, but you don\u2019t have to take any withdrawals from a <a title=\"IRAs and Roth IRAs: What You Need to Know Before You Make This Retirement Account Switch\" href=\"http:\/\/www.investmentu.com\/2010\/January\/iras-and-roth-iras-making-the-switch.html\">Roth IRA<\/a>.<\/li>\n<li>Further, you can leave the whole account to your offspring, who can then stretch out tax-free withdrawals over their own projected life spans.<\/li>\n<li>It especially makes sense for people who are younger, because they have more years of tax-free growth.<\/li>\n<\/ol>\n<h2><strong>A Few Concerns Before Jumping In\u2026<\/strong><\/h2>\n<p>You may have heard that a Roth conversion usually means paying a big tax bill.\u2008Pulling all of those pre-tax and tax-deferred earnings out could mean a pretty substantial immediate hit.<\/p>\n<p>If you want to limit any conversion tax hit, first roll the pre-tax dollars in your IRA (including pre-tax contributions and tax-deferred earnings) into your employer\u2019s 401(k) plan.<\/p>\n<p>Once that\u2019s done, your IRA will hold only your after tax IRA\u2008contributions and possibly earnings on them, depending on whether your 401(k) will take such earnings. Make new after-tax contributions for 2011 and 2012, and then convert at little or no-tax cost.<\/p>\n<p>You probably want to check with your employer sponsored plan about this, but the majority do allow for the roll-in of IRA money. With tax rates and reform on the legislative table, this may be an option to seriously consider.<\/p>\n<p>Good Investing,<\/p>\n<p>Jason Jenkins<\/p>\n<div>\n<a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=v1JAuqGCJ_Y:zHVkFn2Lc-8:yIl2AUoC8zA\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=yIl2AUoC8zA\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=v1JAuqGCJ_Y:zHVkFn2Lc-8:V_sGLiPBpWU\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=v1JAuqGCJ_Y:zHVkFn2Lc-8:V_sGLiPBpWU\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=v1JAuqGCJ_Y:zHVkFn2Lc-8:qj6IDK7rITs\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=qj6IDK7rITs\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=v1JAuqGCJ_Y:zHVkFn2Lc-8:gIN9vFwOqvQ\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=v1JAuqGCJ_Y:zHVkFn2Lc-8:gIN9vFwOqvQ\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=v1JAuqGCJ_Y:zHVkFn2Lc-8:F7zBnMyn0Lo\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=v1JAuqGCJ_Y:zHVkFn2Lc-8:F7zBnMyn0Lo\" border=\"0\"><\/img><\/a>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/InvestmentU\/~4\/v1JAuqGCJ_Y\" height=\"1\" width=\"1\" \/><\/p>\n<p>Article by <a href=\"http:\/\/www.investmentu.com\/\" target=\"_blank\">Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Highly compensated earners still can\u2019t make annual contributions to Roth IRAs \u2013 directly. However, 2010 gave them a loophole\u2026 The origins of the Roth IRA go back to Newt Gingrich\u2019s takeover of Congress back in 1994 and the \u201cContract with America,\u201d where it was called the American Dream Savings (ADS) Account. Unfortunately the plan was &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/www.investmacro.com\/fx\/2012\/03\/29\/stiff-arm-the-taxman-with-a-backdoor-roth-ira\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Stiff-Arm the Taxman with a Backdoor Roth IRA&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-28679","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/28679","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=28679"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/28679\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=28679"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=28679"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=28679"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}