The day after our home flooded, I went back for a few essentials that did not make our initial rescue. The trip began with a friend and I sitting in traffic for 2 hours trying to cross the flooded bayou and finished with us wading through dirty water for about a mile. As we came around the last corner and I saw our home, it hit me, I had I forgotten the house keys! Sure enough, after wading through the last 100 feet of water the front door was locked; the side door was locked; the garage door was locked; and the back door was locked. As I waded back to the front of the house dejected and embarrassed, I prepared to tell my good friend the sorry news. As I reached the porch I heard someone yell from inside the house. “Go back around!”, Surprised to hear anyone in the house, I waded around back. My buddy had wiggled one of our 40-year-old windows open! The window may not have been my first choice but when all the doors were locked I was overjoyed to squirm my 6’ 7” body through it.
There’s often more than one way to meet an objective and investing is no different. Consider Roth IRA contributions.
Roth accounts are a robust tool the IRS gave us to grow our investments tax free. Unfortunately, the same law that made Roth accounts advantageous also placed a cap on earnings for individuals eligible to contribute. As many of us advance in our careers and add sources of additional income, there is a real possibility that we may not be able to contribute to a Roth – at least directly.
For those of us who are blessed to earn more than the current contribution limit allows, the IRS left a window open to contribute indirectly through a conversion. In 2010 the income limit to convert or rollover tax protected accounts to a Roth IRA were lifted. This loophole not only eliminated the contribution restriction on high earners but also provided a path for an increased annual contribution. Using the loophole is legal and simple.
If you have a 401(k), 403(b) or another employee sponsored retirement plan you can roll over your investments to a new or pre-existing Roth IRA. For example, I have a 401(k) account and have been rolling over all my after-tax 401(k) dollars for the past few years into a Roth IRA. This conversion loophole has not only allowed me to contribute to my Roth IRA again, but it also increased the total amount I contribute annually. Previously I was limited to the direct contribution IRS limit of $5,500 but with the ability to roll-over 401(k) dollars the contribution limit rose to $54,000, the 401(k) limit.
If you do not have access to an employee sponsored retirement account or your employer restricted the ability to rollover to a Roth IRA, there is still one more option.
Open a non-deductible IRA and contribute the maximum amount each year. The 2017 contribution limit was $5,500 and $6,500 for those 50 and elder. For updated contribution limits you can check here. Once you have opened and funded a non-deductible IRA, roll it over to a Roth IRA the very next day.
If the benefits of a Roth are as overwhelming in your situation as they are mine, don’t wait for legislation to change, start benefiting from the loophole your sophisticated colleagues have already found. In 2010 when the rule changed there was 10x more money contributed to a Roth IRA than the previous year.
For more information on Roth and Traditional retirement accounts check out our article, Roth vs. Traditional.