Do I qualify to make an IRA or Roth IRA contribution?

You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your Traditional IRA contributions if you or your spouse participates in another retirement plan at work.  Roth IRA contributions might be limited if your income exceeds a certain level.

Income Rules differ between a Traditional and Roth IRAs:

Traditional IRA:  Anyone can make an IRA contribution, but it may not be deductible.  Below are the income limits in place for 2024:

• If married and you and your spouse are not covered by an employer sponsored plan: 

  • Full deduction regardless of income

• If you are covered by an employer sponsored plan:

  • Fully deductible if Modified Adjusted Gross Income is less than $77,000 (single) or $123,000 (joint)

  • Partially deductible if Modified Adjusted Gross Income is between $77,000 and $87,000 (single) or $123,000 and $143,000 (joint)

  • No deduction if Modified Adjusted Gross Income is over $87,000 (single) or $143,000 (joint)

• If you are covered by an employer sponsored plan and your spouse isn’t:

  • Fully deductible if Modified Adjusted Gross Income is less than $230,000 (joint)

  • Partially deductible if Modified Adjusted Gross Income is between $230,000 and $240,000 (joint)

  • No deduction if Modified Adjusted Gross Income is over $240,000

Roth IRA:  You cannot make contributions if your Modified Adjusted Gross Income for 2024 exceed the limits shown below:

• Full contribution if Modified Adjusted Gross Income is less than $146,000 (single & head of household) or $230,000 (joint)

• Partial contribution if Modified Adjusted Gross Income is between $146,000 and $161,000 (single & head of household) or $230,000 and $240,000 (joint)

• No contribution if Modified Adjusted Gross Income is over $161,000 (single & head of household) or $240,000 (joint)

What is a Roth Conversion?

A Roth IRA Conversion is the practice of moving existing traditional (pre-tax) IRA funds into a Roth IRA. This transfer is a taxable event, and the pre-tax amount that is moved is taxed as ordinary income.  It is essentially seen as a traditional IRA withdrawal.  This transaction is not subject to Roth IRA annual contribution limits, and there are no income limitations.

What is the benefit of a Roth conversion?

The benefit of a Roth IRA is that, as long as certain conditions are met, withdrawals are tax free and not subject to Required Minimum Distributions (RMDs).  Roth Conversions are, in very basic terms, beneficial when the amount of tax due at the time of conversion from pre-tax to Roth is less than would be due in the future when funds are withdrawn from the traditional IRA.  Essentially, it is a strategy used to pay tax at a lower rate now AND the funds maintain the ability to grow tax-free for years to come.  The idea behind the benefit of pre-tax savings is that individuals could save more during working years when tax rates are higher due to income, and would be able to withdraw the funds at lower rates when income is more modest in retirement.  This theory is not always relevant, and Roth conversions can be especially advantageous during lower income years.

What is the difference between a Roth Conversion and a Backdoor Roth Conversion?

While a Roth Conversion is essentially seen, in terms of taxes, as a traditional IRA withdrawal, and therefore not subject to annual contribution limits, a Backdoor Roth Conversion is seen as a Roth IRA annual contribution, which is currently limited to $7,000 per year, or $8,000 per year (limits from 2024) for those 50 and over. The reason this is referred to as a “backdoor” conversion, is because these transactions are coordinated in a way to avoid the annual income limits, making a back-door Roth Conversion beneficial for those whose income falls above the annual limits, which would prohibit a direct annual Roth IRA contribution.  There are some unique rules that must be followed closely in order to make this transaction effective and allowable, and this is not recommended without the assistance of financial professionals.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

When can I access my IRA funds?

Rules differ between a Traditional and Roth IRAs.

Traditional IRA:  Generally, if you withdrawal funds prior to age 59 ½ from your IRA, you will pay income tax and an additional 10% penalty tax on the withdrawal amount.  There are some regulations that allow you make to penalty-free withdrawals prior to age 59 ½, but you will still pay income tax.

Roth IRA: A Roth IRA owner can withdraw contributions at any time without paying taxes.  However, only “qualified” Roth IRA distributions that include earnings are tax-free. A distribution is deemed “qualified” when money has been in the account for at least five years and the owner is at least 59½ years old. If the Roth IRA has been open for 5 years, the First-Time Homebuyer clause allows tax free withdrawals of up to $10,000 to purchase a home.

For more helpful information regarding IRAs, click here to visit the IRS website to learn more.