High Income Roth IRA — Weekly Observations for 7/20/2018

A “back door” is no longer needed for high-income earners to contribute to a Roth IRA. Last week a tax law specialist with the IRS unlocked the door, clearly stating that this round-about way of getting funds into a Roth IRA is indeed “allowed under the law”.

I’ve been doing these types of contributions with high-income clients for many years, and while we’ve always known they were legal, we did have to be very careful with the timing and language we used in order to avoid triggering the step transaction doctrine.

The IRS did ask, however, that we stop calling it a “back door”:

“Whenever we see words like ‘back door’…you generally find the IRS is not happy.”

I’m going to go with “High Income Roth IRA” since the need for this strategy only applies to those with income (2018 MAGI) over $120,000 for singles and $189,000 for joint filers.

The process is unchanged — make a non-deductible IRA contribution and subsequently convert it to a Roth IRA. There are more nuances that need to be addressed, such as how we can shift existing pre-tax IRA assets into a 401(k) before getting started (thereby avoiding any tax on the Roth conversion!). But suffice it to say, if you earn too much to contribute directly to a Roth IRA, you need to be exploring this strategy in detail.

Of course, this asset planning needs to consider your overall lifetime tax diversification. But in general, most of us struggle to build adequate tax-free assets prior to retirement, so the High Income Roth IRA is an easy tool to enhance your financial picture.

All the best,