Making a Roth IRA Contribution When You Do Not Qualify

By Dale K. Geeslin, CPA, CFE

Individual retirement accounts (IRA) were started in 1975 as a way to save for retirement on a tax deferred basis. There are now two types of IRA’s, traditional and Roth. Traditional IRA’s can be either deductible, pre-tax dollars, or nondeductible, after-tax dollars. Established in 1997, Roth IRA’s have become a popular tool in retirement planning. Contributions to a Roth IRA are nondeductible but if the rules are followed your contributions and earnings can be withdrawn during retirement on a tax-free basis. Like many aspects of tax law, one size does not fit all. The opportunity for Roth contributions are limited based on income. For 2015, Roth contributions are phased-out for a married couple with total income over $193,000 and for a single person with income over $131,000.

Let’s say that you want to make a Roth contribution but your income is over the limit so your only option is to make a contribution to a tradition, nondeductible IRA. You get no tax benefit in the current year and your earnings are taxed when you take them out. There is still a way you can accomplish your goal of having contributions in a Roth. You can use a method referred to as a “Backdoor Roth”. This is where your funds in the traditional, nondeductible IRA are converted to a Roth IRA. When you contribute to a traditional, nondeductible IRA, you are depositing after-tax dollars so you are only taxed on the earnings. If you do the Roth conversion within a few days, the tax will likely be nominal. This method is most beneficial, if you do not have any deductible IRAs. If you do, then the portion that you convert to the Roth has to be prorated over the total amount you have in all of your IRAs.