How to Contribute to Roth IRA When Your Modified AGI is Over the Contribution Limit

For 2016, if you have taxable compensation and your modified AGI is more than the amount listed below, you are not allowed to make a direct contribution to Roth IRA. However, you can consider making a nondeductible traditional IRA contribution and then convert the nondeductible IRA contribution to Roth IRA. This method is called “backdoor Roth IRA conversion”.

Steps to Convert Nondeductible Traditional IRA to Roth IRA:

Step 1: Estimate taxable income from the conversion.

If you don’t have any traditional deductible IRA, SEP or SIMPLE IRA account, please go to Step 3.

If you have any existing traditional IRA (including SEP and SIMPLE) account, you may want to estimate the taxable income from conversion. As you can see from the table below, you will have to pay more tax if you have higher account balance at the time of conversion. If you don’t want to pay income tax from conversion, go to Step 2.

*** Note: The earnings from nondeductible IRA account must be converted to Roth IRA with your contribution and is taxable.

Step 2: Transfer Your taxable IRA balance.

Transfer all your existing traditional deductible IRA, SEP or SIMPLE IRA account to your 401(K) account before you make nondeductible IRA contribution. If you are self-employed and have no 401(K) account, you can create one and then do the transfer. After the transfer, your total balance in traditional deductible IRA, SEP or SIMPLE IRA account should be zero.

Step 3: Make nondeductible traditional IRA contribution.

Step 4: Convert nondeductible traditional IRA to Roth IRA.

You should convert your nondeductible traditional IRA to Roth IRA ASAP to minimize the earnings from nondeductible traditional IRA account (see case 1 of Step 1).

Step 5: Report the activities from Step 3 and 4 on tax Form 8606 and file with your income tax return.

1. Report the $5,500 nondeductible traditional IRA contribution on Part I of Form 8606.
2. Report the $5,510 conversion on Part II of Form 8606.

Related Article(s)

Traditional IRA vs. Roth IRA


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