In a previous post, we talked about how the IRS updated the 401(k) and IRA contribution limits for 2022, but they’ve also updated the INCOME limits.
The Roth IRA was designed to help the lower and middle class invest for retirement, so that’s why this income limit was put in place. BUT there’s a way around it.
If your income is above the limit, consider doing a backdoor Roth IRA! It’s a (legal) loophole where you contribute *after-tax* money into a traditional IRA and then convert it to a Roth IRA. And just like that, you have money in a Roth IRA.
HOWEVER, be careful when doing this because you may be subject to the “pro-rata” rule. This means that if you have *untaxed* money in a traditional and/or rollover IRA (like from a 401(k) rollover), you are not able to ONLY convert the new after-tax money. A proportion of the untaxed money will also be converted into a Roth IRA, which you’ll then have to pay tax on. If you might be in this situation, it would be a good idea to consult a CPA!
If your income puts you within an allowed contribution of “a reduced amount”, how much does it come out to be? Well, the IRS website has this 5 step formula on how to calculate it. It’s hard to predict your modified AGI in advance, so it’s easier to just do a backdoor Roth IRA with the full $6,000.
Also, if you’re 50 or older, the full amount is $7,000 instead of $6,000!
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.