Roth and Traditional IRAs Optimization

By pjain      Published April 21, 2020, 8:38 p.m. in blog Fin-Plan-Strategy   

Roth and Traditional IRAs Optimization

How much can you add at a maximum

Traditional and Roth individual retirement accounts allow savers to put away up in 2019 $6,000 (or $7,000 if you are age 50 or older).

Roth IRAs and Limits

Roth IRAs let you grow your money free of taxes and then tap it in retirement on a tax-free basis. This is a great gift!

Filers whose modified adjusted gross income exceeds $120,000 if single (or $189,000 for joint filers) are currently unable to make a full contribution directly to a Roth IRA.

Traditional Deductible IRAs and Limits

Backdoor Roth IRAs for High Income

  • Why would someone put money into a non-deductible IRAs? Basically you would be taxed on it right?

  • One reason is that Backdoor Roth IRAs can be used. In these a saver would make a nondeductible contribution with after-tax dollars to a traditional IRA account and convert it to a Roth. This conversion would be free of income taxes in most cases.

  • However, you or your spouse will need to have earned income in a given year in order to put money into the Roth. In other words, you need to have earned income in order to execute this strategy.

New tax law legitimizes

Why proceed with caution - Pro Rata Rule

A scenario where you already have a sizable amount of money in an IRA — the backdoor Roth might not make sense.

Ideally a saver makes a nondeductible contribution with after-tax money and converts it free of taxes. However, if this person already owns other IRAs with pretax amounts in them, the IRS could levy income taxes based on the overall value of all of those accounts.

This is known as the pro rata rule of combining distributions from IRAs. So if you have a $200k existing IRA-1, and a $10k new non-deductible IRA-2. You "try" to distribute from the IRA-2 to create or characterize as a ROTH-3. For tax purposes, it’s treated as if the distribution came from both IRAs, so it will be taxable.

The amounts you have saved in your traditional IRAs, as well as SEP and SIMPLE IRAs, would be included in this calculation.

Retirement Optimization Plan

Max out your Employer Matched Retirement Plans

Individuals should already be maxing out their 401(k) contributions at work or at least getting the full employer match into their retirement plans.

Even if your employer only matches say 3% of your salary, that is in first year a 100% return on investment!

Defer as much of Income as you can

Optimize your HSA esp. if Transferable or Portable

Workers should stash cash in their health savings accounts, if available.

In an HSA, individuals in high-deductible health plans make tax-deductible contributions to this account. There, it grows free of taxes and can be used to cover qualified medical expenses on a tax-free basis.

Consider the backdoor Roth


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