@TheCryptoProbie wrote:
Thank you for the information.
Since I will use 2024 income, I wont be able to contribute to my Roth IRA unfortunately.
Playing with the Fidelity Contribution Calc, it mentions I would be able to contribute the full amount in a Traditional IRA. Does that sounds right?
Thanks again.
Yes, however...
You can always contribute to a traditional IRA, you can't always take a tax deduction. It depends on your filing status, income, and whether you or a spouse has a retirement plan at work.
https://www.irs.gov/retirement-plans/ira-deduction-limits
If you can't deduct the contribution, you can still make one. That means you are adding non-deductible (already taxed) money into what is normally a pre-tax IRA. You get a form 8606 as part of your tax return. Keep this as long as you have your IRA, plus 6 years. This is an exception to the rule that you can discard most tax papers after 3 or 6 years.
Now, several things can happen.
1. If you leave the non-deductible money in the IRA, it will grow tax-free. When you retire, as long as you saved your form 8606s, you don't have to pay tax on the money again. For example, suppose you have a balance of $100,000, of which $6000 is non-deductible. Since 6% of the money in the IRA was already taxed, you only pay tax on 94% of the withdrawal. You continue to use form 8606 to track the remaining non-deductible basis in your IRA.
2. If you have no pre-tax money in ANY traditional IRA, you can immediately convert the money to a Roth IRA. This is the "backdoor Roth IRA" strategy, you make a non-deductible contribution, then convert it. Normally you pay tax on conversions but since this is non-deductible and already taxed, the conversion is tax-free. Two steps to get the money into a Roth instead of one step. (And note, this only applies to traditional IRAs, not pre-tax work plans like 401ks. You can have a pre-tax work plan and still do a backdoor Roth IRA as long as you don't have pre-tax (deductible) money in a traditional IRA.
3. If you already have deductible (pre-tax) money in any IRA (they are all combined for this calculation), and you still want to convert to a Roth, you have to use the pro-rata rule. For example, suppose you have a traditional IRA balance of $100,000, of which $6000 is non-deductible. If you were to convert $10,000 to a Roth IRA, you would pay tax on 94% of the conversion and 6% would be tax-free. Your IRA balance would now be $90,000 with $5400 being after-tax. You can gradually convert your IRA to a Roth IRA, and eventually you will get to the point where your IRAs are empty. This is tough because if you are in a high income bracket, you will pay a lot of tax on the conversion, so it does not always make sense to do this.
