If you're interested in contributing to a Roth IRA but your income exceeds the IRS limits, you can still save for retirement in a tax-smart way. A clandestine Roth IRA may be attractive if you've been prevented from contributing to a Roth because of your income. However, it's important to consider your retirement schedule. The further away you are from retirement, the more sense it will make to open a Gold IRA.
This is an excellent way to diversify your retirement portfolio and ensure that your savings are protected. This is because the tax-free growth of your Roth account will have more time to offset the immediate fiscal impact you will suffer from making the conversion. No matter what the reason, contributing beyond the IRS limit could result in a tax penalty if you don't take steps to manage the franchise. If your income is too high to deduct contributions to a traditional IRA, you may qualify for a Roth IRA. However, contributions to a Roth IRA are not tax-deductible.
Contributions to the Roth IRA continue to be a long-term investment in a retirement savings plan. No, there is no maximum income limit for a traditional IRA. Anyone can contribute to a traditional IRA. While a Roth IRA has a strict income limit and people with incomes above it can't contribute at all, that rule doesn't apply to a traditional IRA.
But what happens if your income is less than the maximum contribution amount for an IRA? In this case, you can only contribute up to the actual dollar amount of your earned income for the year. Basically, you can't contribute to your IRA more than you earn. What your co-worker may have been thinking is that you cannot make a tax-deductible contribution to an IRA. Even though you don't realize it at the time, your income is too high to make contributions to a Roth IRA.
Alimony, child support, rental income, investment income, and unemployment benefits are not included in your earned income. While there is no general limit for contributing to a traditional IRA, there are income limits for tax-deductible contributions. In fact, a penalty of 6% per year will continue to be imposed on you until the excess contribution is absorbed or distributed. In short, non-deductible contributions that are invested in tax-efficient assets do not reach the fiscal alpha level.
The taxable proportion of your contribution is equal to the percentage of taxable contributions in all your IRAs. The clandestine strategy works best if you don't already have a traditional IRA, since you won't have to pay taxes on your contribution. In general, asset allocations go from being aggressive to conservative with age, which usually reduces the fiscal efficiency of the portfolio, since it is more earmarked for fixed income investments. Table 5, below, illustrates the built-in tax liability for both the traditional IRA and the taxable account.
In a clandestine Roth IRA, a person makes a non-deductible contribution to a traditional IRA and then converts that account into a Roth IRA. An excess IRA contribution usually occurs if you contribute more than the contribution limit, contribute more than your earned income, or make an undue cumulative contribution to an IRA (e.g., if your spouse is covered by a plan at work, there is also a limit to the amount of tax-deductible contributions you can make to your traditional IRA each year). The financial institution that holds your traditional IRA contributions transfers them directly to the institution that holds your Roth IRA.
