6 advantages of Roth IRAs
Reason No. 5: High earners have a 'back-door' entry
High-income earners can generally not make a contribution to a Roth IRA. The IRS has income thresholds that limit the size of the contribution that high earners can make. Above that threshold, direct contributions to a Roth IRA are disallowed.
But there is a way around that. People who make a lot of money can make a nondeductible contribution to a traditional IRA and then convert it to a Roth.
"It's what we call a back-door Roth. Everybody can do a nondeductible IRA and then convert to a Roth," says Armstrong.
"Up until 2010, there were limitations on who could convert. Now that is one of the options for anyone who had built up assets in a traditional IRA," says Hevert.
However, the IRS does require you to take into consideration all your pretax holdings when figuring the tax liability of a conversion. Because it's complicated, it's best to consult a tax professional before attempting this maneuver.