The “Upper-Class” Roth IRA

June 10, 2013

Do you have any clients that might be considered part of the “upper-class,” making too much money to contribute to a Roth IRA? Well, there is a workaround that may help.

Did you know that, based on the most recent Census Bureau 2012 numbers, if you made more than $150,000 then you fall within the top 5% of American income earners, and are part of what most would define as the “upper-class”? And if you made more than $250,000, then you are at the top of the economic ladder and within the top 1% of American income-earners? A very surprising statistic if you ask me, but what isn’t so surprising is that, based on conversations I have on a daily basis with advisors, most of these “upper-class” households don’t realize they might be missing out on a very effective tax retirement tool that is normally only available to individuals with lower incomes.


The Issue

If you want to make a contribution (i.e., $5,500) to a Roth IRA in 2013, you must have taxable compensation, but your Modified Adjusted Gross Income (MAGI) must be below or within certain limits as is noted below in the table.

Tax Filing Status MAGI Contribution Amount
Married Filing Jointly Less than $178,000 Full Contribution
At least $178,000,but less than $188,000 Partial Contribution
$188,000 or more No Contribution
Single Filers Less than $112,000 Full Contribution
At least $112,000, but less than $127,000 Partial Contribution
$127,000 or more No Contribution

Anyone that makes more than the stated MAGI limits cannot fund a contributory Roth IRA. This limitation seems to leave them without any Roth IRA opportunities, right? Not so fast…back in 2010, a workaround became available due to some changes to Roth conversion rules.


Brief History Lesson

As you might recall, before 2010, investors could only convert traditional IRAs to Roth IRAs if their MAGI was not more than $100,000. But with the passage of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), starting in 2010, the MAGI limit was permanently lifted and anyone, regardless of their MAGI, can convert to a Roth IRA.

This means that anyone with an IRA can technically open a Roth IRA by funding it with a taxable conversion. But what if your clients either don’t have other IRAs, and/or don’t want to pay the taxes on the conversion? Well, that’s where you step in.


Your Opportunity

The opportunity that you can bring to the table is the idea of contributing to a non-deductibleIRA, then immediately converting it to a Roth IRA. Assuming your clients are eligible to make a Traditional IRA contribution this can all be done in two simple steps:


Ø  Step 1: Open a Traditional IRA Account and Make a Non-Deductible IRA Contribution- if the client’s MAGI is too high to contribute directly to a Roth IRA, then they undoubtedly make too much to make a deductible contribution to a Traditional IRA (as you’ll see explained in more detail in one of Gary Pence’s blog posts), unless they are not participating in a employer-sponsored retirement plan (IRA contribution limits still apply). Just be sure IRS Form 8606 is used to report these contributions.


Ø  Step 2: Convert the Traditional IRA to a Roth IRA- assuming that this is done immediately, there should be little to no earnings that will result in tax liability to the client. If there are no gains in the Traditional IRA the client is essentially doing a “tax-free conversion” because all of the monies being converted are post-tax (since the IRA contribution was not deducted on their taxes). If a small gain accrues before the conversion, some taxes may then be due.


CautionAggregation Rule Could Apply


To sum it up though, if your client has other IRA account assets (i.e., traditional, SEP, & SIMPLE), this strategy might not be a good idea, unless they are converting those other IRA assets as well, because of the complexities that arise in tracking pre- and post-tax dollars. Of course, any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or attorney.

So, if you have any potential “upper-class” clients looking for the benefits of a Roth IRA, set up a meeting to discuss their potential interest in an “upper-class Roth IRA.”

If you have any additional questions, please feel free to contact Retirement Strategies Group at (800)722-2333, ext. 3939, or e-mail us at

Picture of Chad Goforth

Chad is currently an Attorney Consultant for the Corporate Law Department at Pacific Life. Previously, he was a Senior Retirement Strategies Consultant, bringing more than 13 years of industry experience to his role and providing technical insights to our sales team and registered representatives on a variety of issues including IRAs, qualified plans, annuities, and estate planning issues.

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