Dear Sanjiv Gupta
I have a question about the Roth IRA. I always exceed the income limits to open a Roth individual retirement account. However, I was told that I should consider opening a nondeductible IRA and then rolling it over to a Roth IRA.
My question is, A.) Is this possible? B.) Can I do this again and again, meaning this rollover to be done only once, or would I be able to deposit money into a nondeductible IRA and then roll it over into the Roth IRA each year, provided there are no changes in the tax law? Is there anything else I need to pay attention to?
— Devish Kumar
You should look at two aspects when considering the IRA. A.) Tax Benefits Today and B.) Tax Consequences in the future. In an ideal situation, you would like to save in both cases (as much as possible). And therefore it is important to look at the big picture. You should sit down with your tax professional and share your goals and together come up with a game plan to maximize the tax savings.
Now, as to your original question, Converting Non-Deductible IRA into Roth
Taxpayers are limited by AGI (adjusted gross income) levels as to whether or not they can contribute directly into a Roth IRA, however, there are no income limitations in doing a conversion from a traditional IRA into a Roth IRA. Non-deductible IRA has no tax benefit for your current tax year however Roth allows you to take qualified distribution tax-free in retirement. Therefore, it makes sense to do the conversion.
Now, Can you roll over your Non-deductible IRA into Roth? – Yes, you can do this every year. This process is known as Roth IRA conversion. The idea is that once you retire, you will typically have more control over investment choices and account expenses with a Roth IRA than you will with your company-sponsored retirement plan.
We recommend that you should first consider contributing to your 401K plan and once you maximize there, you should consider investing in IRA. This way you can plan to save today and for the future.
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