Lincoln Perkins, CPA


Mr. and Mrs. Roth want to accumulate monies in individual Roth IRA’s so they will have an income tax free source of cash during their future retirement.

Unfortunately, their adjusted gross income is higher than the IRS limits and they are prohibited from making direct contributions to a Roth IRA.

The good news is there is a legitimate strategy that allows them to get monies into Roth IRA’s each year so they can work toward their goal.

Step 1: Because they are each over the age of 50, they can each contribute $7,000 to a “Non-Deductible Traditional IRA” as there are no adjusted gross income limitations on this type of IRA contribution. The fact that Mr. Roth is a participant in an Employer-Sponsored 401(k) Plan makes this their only choice for contributing to an IRA.

Step 2: Once the money is contributed to a “Non-deductible Traditional IRA” for them it can then be “Converted”, or rolled to each of their respective Roth IRA accounts. This is referred to as a Roth Conversion. The conversion can take place literally the next day from the original contribution. It is a paper trail to get the money into the Roth accounts.

Step 3: Typically the IRA custodian issues a 1099-R which reflects the conversion from the traditional IRA to the Roth IRA which is necessary to report to IRS. Since there was no tax deduction on the original contribution and no earnings have accumulated on the contribution there is, in some cases, no taxable event on the taxpayers return. They report the conversion as non-taxable except to the extent of earnings. This is why the conversion is done quickly before earnings accumulate.

WARNING: If Mr. and Mrs. Roth have traditional IRA accounts with pre-tax monies in them, this strategy will NOT be tax-free. This strategy is only tax-free if Mr. and Mrs. Roth do not have any IRA’s with pre-tax monies in them. Please be sure to consult with your tax advisor before implementing this strategy.

This process is repeated each year and wealth (earnings) is accumulated completely tax-free for the IRA owners and their beneficiaries.

Reach out to us with any questions you have about making the most of your IRA!

Thank you!