Roth IRAs offer substantial benefits. Although contributions aren’t deductible, qualified distributions are tax-free — the growth is never taxed. And unlike traditional IRAs, Roth IRAs have no required minimum distributions. So if you don’t need the money in retirement, you can let the entire balance grow tax-free to benefit your heirs.
But modified adjusted gross income (MAGI)-based phaseouts limit who can contribute. For 2013, the phaseout ranges are:
- $178,000–$188,000 for married taxpayers filing jointly, and
- $112,000–$127,000 for singles and heads of households.
You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
Fortunately, there are three ways higher-income taxpayers can still take advantage of Roth accounts:
1. Allocate your resources. Your employer may allow you to allocate some or all of your 401(k) plan contribution to a Roth account — and no income-based phaseout applies. In 2013, the 401(k) contribution limit is $17,500 ($23,000 if you’ll be age 50 or older on Dec. 31). Any employer match will be made to a traditional account.
2. Become a convert. If you have a traditional IRA, converting some or all of it to a Roth IRA may be beneficial. The converted amount is taxable in the conversion year, but future qualified distributions will be tax-free. There’s no longer an income-based limit on who can convert.
3. Knock on the back door. If you don’t have a traditional IRA, a “back-door” Roth IRA is an option: You set up a traditional IRA and make a nondeductible contribution (up to $5,500 in 2013, or $6,500 if you’ll be age 50 or older on Dec. 31). Once the transaction has cleared, you can convert to a Roth IRA and the only tax due will be on any growth from the contribution date to the conversion date.