If you earn a lot and want to contribute to a tax-friendly Roth IRA now, it's a two-step process. But it's a process a growing number of high earners are willing to undertake.
Under current rules, you can only contribute directly to a Roth if you have an income of less than $131,000, or $193,000 if you're filing as a married couple. High earners have gotten around the income cap, however, by making nondeductible contributions—up to $6,500 in 2015 for those 50 or older—into a traditional IRA, which doesn't have income limits as long as investors aren't claiming a deduction. They then convert the IRA to a Roth. (Since they've effectively paid tax on the money when they made the contribution, they won't have to pay tax on it again later.)
The number of conversions took off in 2010, after the IRS lifted income restrictions on converting to a Roth IRA. Traditional-to-Roth IRA conversions increased by a whopping 800 percent over the following year, from $6.8 billion in assets in 2009 to $64.8 billion in 2010, according to an IRA analysis. And the number has continued to climb.
Last fall, the Internal Revenue Service also released a notice clarifying that workers who are allowed to make after-tax contributions to their 401(k) plans can also roll that money into a Roth. That means savers could, hypothetically, put more than $50,000 into a Roth IRA each year. (For 2015, the IRS established an individual contribution limit of $53,000, or $59,000 for those 50 and older who are catching up.)
But both options would end under President Barack Obama's proposed 2016 budget plan, as after-tax money held in a traditional IRA or an employer-sponsored retirement plan like a 401(k) would no longer be eligible for conversion to a Roth IRA account.
Chances of adoption: Small. This provision is particularly surprising, given the IRS clarification last fall, said Jeffrey Levine, a CPA and an IRA technical consultant with Ed Slott & Co. "It's like the left hand isn't talking to the right hand," he said, adding that while it seems like an "unfair" provision, there's still a chance it will pass.
What advisors are saying: Better to be safe than sorry. "If you were considering a back-door Roth IRA, do it this year and maximize your contributions because you may not be able to do it next year," said Cathy Curtis, a certified financial planner and founder of the fee-only investment advisory firm Curtis Financial Planning. "Not putting all your eggs in one basket is a good strategy. And a Roth is one more basket to have."
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