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Enter into a Roth IRA through the ‘back door’

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in Centerpiece,Small Business Tax,Small Business Tax Deduction Strategies

Although one barrier for Roth IRAs has been removed, another exists for certain taxpayers: You can’t make annual contributions to a Roth if your income is too high. But there’s a clever way to get around this obstacle.

Strategy: Go in through the “back door.” You can do it by making nondeductible contributions to a traditional IRA and then converting the traditional IRA into a Roth IRA.

The maximum annual amount you’re allowed to contribute to your IRAs, including any combination of traditional and Roth, is limited to $5,000 for 2012 ($6,000 if you’re age 50 or older as of Dec. 31, 2012). But there’s nothing to prevent you from using the back-door approach each year.

Here’s the whole story: With a Roth IRA at least five years old, distributions are completely exempt from income tax if you are over age 59½.

In contrast, distributions from a traditional IRA may be fully taxable at ordinary income rates reaching up to 35%. So y...(register to read more)

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