Roth IRAs: 2 Funding Options for High-Income Earners

Estimated reading time: 2 minutes, 23 seconds

Contributions to Roth IRAs are made on an after-tax basis. This enables the accounts to provide tax-free earnings and tax-free qualified distributions.

However, it’s well-known that income limits are a key difference between Traditional IRA and Roth IRA contribution rules. Income determines one’s eligibility for a full or partial Roth IRA contribution, as outlined in IRS Publication 590-A. For Tax Year 2018, the income eligibility limits are as follows:

  • Single tax filer – $135,000
  • Married filing joint tax return – $199,000
  • Married filing separate tax return – $10,000

High-income earners are, therefore, generally ineligible for annual contributions to Roth IRA. But if you’re in this camp, did you know that you don’t have to completely rule out a Roth IRA?

High-income earners could utilize rollover and conversion rules to fund a Roth IRA.

In a retirement plan rollover, keep in mind that not all plans have a Roth option. Yet, you may still roll from a 401(k), for example, to a Roth IRA if a triggering event occurs. The pretax funds to be rolled over will be subject to income tax for the year in which the movement occurs. This may result in a significant tax hit if an entire balance is rolled in a year, though this can be done over multiple years as well.

But if the qualified plan does have a Roth option, the tax ramifications change. If a triggering event occurs, you can roll over these Roth assets to a Roth IRA. Since these involve after-tax contributions, they are not subject to income tax when the movement occurs. This also means the rolled over earnings are non-taxable.

A second option is to convert Traditional IRA assets to Roth IRA assets. As with a plan rollover, the pretax funds to be rolled over will be subject to income tax for the year in which the movement occurs. Also, any basis to be converted (nondeductible contributions, rollovers of after-tax funds, etc.) is also not taxable.

This option would also include the so-called “backdoor Roth IRA.” An individual could make nondeductible contributions to a Traditional IRA and then later convert the assets to a Roth. Income tax would apply only on the amount of accumulated earnings. Understand, however, that the federal government has backdoor Roth IRAs in its crosshairs. In fact, it was even in the 2016 budget recommendations but did not become law.

High-income earners should consider any pros and cons to utilizing retirement plan rollovers and conversions to fund their Roth IRAs.

While Kingdom Trust can assist you with general funding questions, you should discuss the strategies themselves with your team of professionals. These professionals will help you determine whether a strategy is beneficial or whether you should stay the course with your current account setup.

Have questions about your Kingdom Trust account? If during regular business hours, click on the chat button on this page to speak directly with us. Otherwise, email us at for assistance.

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