Getting Around Income Limits for a Roth IRA

I earned too much in 2013 to contribute to a Roth IRA. Can I contribute to a traditional IRA for 2013 and immediately convert it to a Roth? Do I have to pay taxes on the conversion?

See Also: Income Limits for Roth Contributions in 2014

There are no income limits for making nondeductible contributions to a traditional IRA and for converting that money to a Roth. So if you're single and your adjusted gross income in 2013 exceeded the limits for contributing to a Roth -- more than $127,000 ($188,000 if you're married and filing jointly) -- it's a great way to open a Roth. (See 2013 Retirement Account Limits for more information about the Roth IRA income and phaseout limits for 2013 contributions.) You have until April 15, 2014, to contribute up to $5,500 to a IRA for 2013 (or up to $6,500 if you were 50 or older in 2013).

There's no IRS requirement that you hold the money in the traditional IRA for a particular length of time before converting it to a Roth. But if you make your IRA contribution by check or electronic funds transfer from your bank, it could take up to four days for the money to be available for withdrawal or rollover, says Ken Hevert, vice-president of retirement products for Fidelity. If you have cash in a taxable brokerage account, you may be able to speed up the process, says Hevert.

Jim Blankenship, a certified financial planner and enrolled agent in New Berlin, Ill., generally advises clients to wait at least a few days for recordkeeping purposes (and even as long as a month) before converting the money. If the contribution and the conversion are on separate monthly statements, he says, it is clear that the original contribution was to a traditional IRA rather than a Roth.

You do not need to pay taxes on nondeductible contributions you convert because that money has already been taxed. And if this nondeductible IRA contribution is the only money you have in a traditional IRA, you need only pay taxes on the earnings between the time you made the contribution and when you converted it to a Roth. But if you have other money in traditional IRAs, your tax bill will be based on the ratio of nondeductible contributions to the total balance in all of your traditional IRAs. So if you make an after-tax contribution of $5,500 this year and you have a total of $50,000 in traditional IRAs, then 11% of the money you convert will be tax-free and the remaining 89% will be taxed at your income-tax rate when you convert. If you convert the traditional IRA to a Roth now, you'll report the conversion with your 2014 taxes. After the conversion, the money grows tax-free in the Roth. See Why You Need a Roth IRA for more information about the benefits of Roth IRAs.

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