Reconsider Roth IRA Contributions Over the Next Decade

Roth IRA contributions require different decisions under the new law. Between the recent slide in the stock market and the enactment of the Tax Cuts and Jobs Act, you may want to rethink whether Roth IRA contributions make sense.

Contributions to Roth IRAs are not tax exempt but there’s no taxes on withdrawals from these accounts if they’re made at age 59.5 and up — the exact opposite of when taxation kicks in for all other types of retirement accounts.

As such, the Roth IRA primarily appealed to the young — and to an extent directly proportionate to the amount of time you had until retirement.

Rethink Roth IRA Contributions

The other rationale for contributing to a Roth IRA has gained wider relevance under the new tax law: if you anticipate having a higher tax burden in retirement than you do presently.

Most people now fall into that category because the tax cuts that just went into effect begin to sunset in 2025, at which points higher tax rates take effect.

That means that from now through 2024, you can save money on taxes by maxing out the allowed contributions to a Roth IRA — $5,500 annually for those under 50 and $6,500 for those 50 and up.

About Roth IRA Eligibility

However, eligibility to directly contribute to the Roth IRA starts to phase out among higher income brackets, making ineligible for direct contribution those who file as single earning $133,000 a year or more, married filing jointly with $196,000 annual income and married filing separately with at least $10,000 in annual income.

Notice the use of the word “direct” before “contribution” — that’s because it’s possible to make what some call a “back-door” contribution to a Roth, where you first put the money into another type of IRA and then you convert it to a Roth. These conversions are limited to the same amounts — $5,500 for people under age 50 and $6,500 for those 50 and older.

Conversions from other types of IRAs to Roth gain appeal whenever stocks in value following your original contribution — and with the markets becoming more turbulent since 2018 began, the prospect of converting other types of IRA contributions to Roth starts to look appetizing.

Last Year To Change Your Mind

If you convert another type of IRA contribution to a Roth, you have until mid-October of 2018 to change your mind and recharacterize it as the original type of contribution; this is the last year you have the ability to make this type of change.

The mid-October 2018 deadline also applies to any other type of IRA contribution you wish to reverse — something you might want to do if you see a prolonged slide in stock prices.

The ability to make this type of recharacterization also ends this year — assuming the Tax and Jobs Act doesn’t undergo additional revisions.

Meanwhile, you still have until the day that tax returns are due this year, April 17, to complete contributions to any type of retirement plan.

Talk to an Accountant

If all of this sounds confusing, ask your accountant or financial planner whether to switch any of your IRA contributions to Roth. And check out what the IRS has to say on the subject of Roth IRA contributions:

Readers, what issues have you found confusing or challenging this tax season? And do you have any concerns about whether to contribute to a Roth or other type of IRA as the stock market becomes more volatile? Please don’t hesitate to share in the comments section any questions you might have about retirement plans or taxes — we just might use them as the basis for blog posts over the next six weeks.

If you want to learn more about how tax filing has changed, be sure to check out the following articles from our archives:

Jackie Cohen

Jackie Cohen is an award winning financial journalist turned turned financial advisor obsessed with climate change risk, data and business. Jackie holds a B.A. Degree from Macalester College and an M.A. in English from Claremont Graduate University.