Can I Contribute to an IRA and Convert to a Roth if I Am Over the Income Limit?

by Leslie McClintock

Many people are attracted by the tax-free growth offered in Roth IRA accounts: It simplifies retirement planning and eases potential estate tax burdens. But until recently, there was an income cap of $100,000 on conversions to Roth IRAs. That income cap was lifted in 2010, allowing anyone to roll unlimited traditional IRA balances into Roth accounts, provided they paid income taxes due. But there was also an income limit on making new contributions to Roth IRAs. Fortunately, the law allows a workaround.

Non-Deductible IRA Contributions

As of 2011, the maximum allowable contribution to a traditional IRA is $5,000 per year, or $6,000 for taxpayers over age 50. The income limits still apply, but they don't restrict your ability to contribute up to $5,000 (or $6,000, if applicable) to a traditional IRA; they only restrict your ability to deduct that contribution against income. You can still make nondeductible contributions to a traditional IRA, regardless of your income.

Converting to a Roth IRA

Since Roth IRA contributions are not deductible, there is no real difference between an IRA contribution and making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA. If you file your taxes correctly, you will have an IRS Form 8606 that documents your non-deductible contributions to the IRA. The IRS does not charge income tax on money attributable to contributions upon which you already paid income taxes.

Rollover Rules

You can roll over any balance from a traditional IRA to a Roth, regardless of the amount, and regardless of your income. However, you must complete the rollover within 60 days of initiation, or you will not only have to pay income taxes on the balance, but also a 10 percent penalty if you are under age 59 1/2.

Roth IRA Income Limitations

Who might use a nondeductible IRA contribution as a way to fund a Roth IRA? Married couples who earn more than $169,000 per year, or single individuals making up to $107,000 per year. Up to that income level, you can make the full $5,000 contribution directly to a Roth IRA. Your allowable contribution reduces gradually the more you make, until your allowance disappears at an income of $122,000, as of 2011. If you make over this amount, and you still want to contribute to a Roth IRA, you will need to use a traditional IRA as a conduit and convert your balance.

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