Phased Out of a Roth IRA?
Unfortunately, many taxpayers who would otherwise want to contribute to a Roth IRA cannot due to the income-based phase-out that ranges from $183,000 to $193,000 for married couples; $116,000 to $131,000 for singles and heads of households. However, there is a work-around for this. Taxpayers can make a nondeductible contribution to a traditional IRA account; then convert the amount from the traditional account to a Roth. This works ideally with taxpayers that do not have any traditional accounts with deductible contributions. In these cases, there is minimal tax impact on conversion.
This still works for those that have traditional accounts with deductible contributions. However, under this scenario, there will normally be a greater tax impact under what is known as the pro rata rule. Without getting into the weeds, the pro rata rule requires that you consider all of your traditional IRA accounts – those with deductible and nondeductible contributions. Therefore, a portion of the conversion would be consider from the deductible contributions and be subject to tax on a pro rata basis.