OPINION: The tax treatment of retirement savings for the upper middle class could not be any more complicated.
You can’t contribute to an individual retirement account for 2019 with pretax dollars if your adjusted gross income is above $74,000. And you can only make a very limited, smaller pretax contribution if your income is above $64,000.If you’re married and filing jointly, you can’t make any pretax contribution if your combined adjusted gross income is above $123,000. And you can only make a small pretax contribution if it’s above $103,000.
Ajay Sarkaria, a vice president of advanced planning at Fidelity, adds: “The IRS made it pretty explicit that this is a permitted technique, and it is quite commonly utilized by many of our clients.” An illustration: Let’s say you’ve made $45,000 in pretax IRA contributions in past years. Now let’s say for 2019 you are over the AGI limits. So you decide to do a “back door Roth.” You contribute $5,000 in after-tax dollars to a nondeductible traditional IRA, and immediately do a $5,000 Roth conversion.The IRS thinks you’ve converted $5,000 to a Roth out of your entire pool of $50,000 IRA contributions.
In that case they’re still contributing $5,000 to an IRA. But they’re contributing with after-tax dollars. And they’ll have to pay income tax on the investment gains when they eventually withdraw the money.
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