There are many high earners who would like to contribute to a Roth IRA, but believe they are disqualified from contributing because of their high earnings.

Below I created a quick case study for a specific set a parameters in which high earners can still maximize the benefits of a Roth IRA.

Case Study: Non-deductible IRA  –> Roth Conversion
Jim and Sarah is a married couple in their 30s. Jim is a pharmacist earning $150,000 annually, and Sarah is a dentist earning $225,000 annually. Their income disqualifies them from contributing directly to a Roth IRA.

Both Jim and Sarah max out their 401k plans, and neither of them have any IRA accounts.

Under the current tax regulations both Jim and Sarah are eligible to make the maximum non-deductible contributions to an IRA.

Under the current tax regulations both Jim and Sarah are eligible to make one Roth IRA conversion each year.

Meaning that Jim and Sarah could each open an IRA account and Roth IRA account, and then make maximum non-deductible contributions (currently $5,500/year) to the IRA. The next day they could each do a Roth conversion all without creating any tax consequences.

The result is maxing out Roth IRAs, just with some added operational steps.

This example works with couples filing jointly or with individuals that exceed the income limits.

A few things to remember:
– This example works so great because neither person has a traditional/pre-tax IRA.
– This example works so great because there are no tax-deferred capital gains within the IRA accounts at the time of conversion.
– All IRAs are accounted for when making a Roth Conversion, not just the IRA being converted or even the portion of an IRA being converted. Meaning that having multiple IRAs, or an IRA with capital gains (even if all contributions were made in a tax-deductible manner) will change the tax consequences of the conversion.