Because of income limits, many high-income CRE brokers believe they cannot contribute to Roth IRAs – but this is not always the case.
If a broker or their spouse participates in a qualified retirement plan, they can easily find themselves unable to deduct contributions made to IRAs from their taxable income. With only non-deductible contributions available, most would prefer to contribute to a Roth IRA instead of a traditional IRA, because future growth in a Roth IRA can be tax free. In a traditional IRA, growth is taxed as ordinary income when it is distributed.
Unfortunately, income limits prevent direct contributions to a Roth IRA. Generally, a single taxpayer cannot contribute if income is above $137,000 and for a married filing jointly taxpayer, the limit is $203,000 for 2019. However, with careful planning and a few extra steps, you should be able to make these contributions annually regardless of income.
How so? All taxpayers can contribute to an IRA regardless of income. The income limits only affect whether the contribution is tax deductible. So, for the high-income broker, contributions to a traditional IRA are still allowed, although no tax deduction will be received.
Because there are no income limitations to “convert” an IRA to a Roth IRA, a high-income broker can contribute to a traditional IRA, then convert the traditional IRA to a Roth IRA. Because the contribution was “non-deductible” there will not be taxes caused by the Roth conversion. This technique is commonly referred to as a “backdoor” Roth and is easily accomplished if the taxpayer has no other IRAs.
It is possible to have multiple IRAs, including SEP, Simple and Self-Directed, but having a balance in any of these accounts will interrupt this strategy. If there are existing IRAs, there are ways to zero-out these account balances before making the contribution and conversion without causing any taxation.
For instance, most Individual 401(k) plans allow you to “roll-in” other retirement plan assets. Once you have transferred your IRA balance(s) to the Individual 401(k), you will be able to make the non-deductible IRA contribution and immediately convert it to a Roth IRA, effectively giving yourself a Roth IRA contribution. This rollover tactic does not work with SEP-IRAs.
The recently passed CARES Act extended the deadline to make a 2019 Roth IRA contribution to July 15, 2020. This may give you enough time to strategize and rearrange your retirement accounts to be able to make a Roth IRA contribution for last year. Since there is a specific order to the steps in this process, please contact us so we can help you through it and make the most of your retirement dollars.
