The Anna Maria Island Sun Newspaper

Vol. 16 No. 10 - January 6, 2016


Anna Maria Island Sun News Story

High-income earners can still use a Roth IRA

Investment Corner

Have you ever known something was right for you and been told you couldn’t have it? It can be pretty frustrating. Many high-income earners, who would like to contribute directly to Roth accounts, cannot do so because of IRS income limits. However, that doesn’t mean it’s impossible for high-earners to reap the benefits associated with Roth accounts, such as tax-free growth, tax-free distributions and no required minimum distributions. They may be able to participate in Roth accounts by:

1. Converting an existing Traditional IRA to a Roth IRA. Anyone can move the assets accumulated in a traditional IRA account to a Roth IRA account, regardless of income. The catch is you’ll owe current income tax on the amount converted. This may be a sound choice if:

• You want tax-free income during retirement;

• You expect to be in the same or a higher tax bracket in the future;

• You can pay taxes owed from sources other than the IRA account;

• You plan to leave the account for your heirs.

2.Completing a backdoor Roth conversion. If you earn too much to contribute directly to a Roth IRA (adjusted gross income of $131,000 or more for a single filer; $193,000 for joint filers in 2015), then you can contribute to a non-deductible traditional IRA and convert it to a Roth IRA. This is called a backdoor Roth conversion. It may have some appeal for high-income individuals even though IRA contribution limits, which are $5,500 in 2015 ($6,500 if you are age 50 or older), make it difficult to build a substantial position.

Before pursuing a backdoor Roth conversion, it’s essential to thoroughly understand the rules and limitations. For example, the pro-rata rule requires individuals who are complete backdoor Roth conversions to calculate taxes owed across all untaxed IRA assets. So, if you have other IRAs that have not been taxed then a pro-rata portion of any assets converted to a Roth IRA may be taxable. Your financial professional or tax account will be helpful in understanding the limitations.

If you complete a Roth conversion of any kind and regret the decision, you can re-characterize the conversion by converting the Roth IRA assets back into a traditional IRA. This must be done within specific time frames.

3. Making Roth contributions to a 401(k) plan. Not all employer-sponsored retirement plans offer Roth 401(k) plan contributions. If yours does, take advantage of it. There are no income limits on Roth 401(k) contributions and contribution limits are more generous than those for traditional IRAs. During 2015, plan participants may contribute up to $18,000 to a 401(k) plan account, plus up to $6,000 more, if they are age 50 or older.

No matter how much money you earn, it is possible to enjoy the benefits of a Roth account. Just make sure you talk with a financial professional and understand the rules, limitations and potential impact of any conversion before you take action.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit