Can I Contribute To My Roth IRA? A Roth IRA is a great option for you who is looking to save after-tax dollars, offering the opportunity for tax-free growth and relaxed distribution rules. Unfortunately, eligibility to contribute to a Roth IRA is subject to restrictions, which can cause confusion.
To help make the analysis easier, we have created the “Can I Contribute To My Roth IRA” flowchart. It addresses the key eligibility considerations, including:
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Earned income
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Other (traditional) IRA contributions
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Filing status-based MAGI thresholds
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Making A Deductible IRA Contribution
Can I Make A Deductible IRA Contribution? A traditional IRA is a great option for you who is looking to save for retirement in a tax-deferred account. However, there are many factors to consider when determining whether you are eligible to make contributions, and whether such contributions will be deductible or not.
To help make the analysis easier, we have created the ”Can I Make A Deductible IRA Contribution” flowchart. It addresses common factors affecting eligibility rules for traditional IRAs, including:
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Earned income
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Coverage under an employer plan
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Other (Roth) IRA contributions
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Filing status-based MAGI thresholds
Making A Deductible IRA Contribution
Can I Make A Deductible IRA Contribution? A traditional IRA is a great option for you who is looking to save for retirement in a tax-deferred account. However, there are many factors to consider when determining whether you are eligible to make contributions, and whether such contributions will be deductible or not.
To help make the analysis easier, we have created the ”Can I Make A Deductible IRA Contribution” flowchart. It addresses common factors affecting eligibility rules for traditional IRAs, including:
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Earned income
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Coverage under an employer plan
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Other (Roth) IRA contributions
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Filing status-based MAGI thresholds
Considering Doing A Roth Conversion
Should I Consider Doing A Roth Conversion? There are a lot of important considerations to weigh before doing a Roth conversion. As a result of the current market condition and changes due to the SECURE Act, Roth conversions are becoming an important strategy that is worth discussing. This flowchart addresses some of the major decision points to help you be guided through the conversation.
This flowchart covers:
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Changes in marginal tax rates for you (or your heirs)
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Ability to pay the associated tax with cash outside the retirement account
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Five-year rule implications
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Impact of income-based programs (IRMAA)
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Making A Backdoor Roth IRA Contribution
Can I Make A Backdoor Roth IRA Contribution? If you earn too much, you are unable to make a regular contribution to a Roth IRA. But, there is a workaround called the Backdoor Roth Contribution. There are many factors and rules that must be considered, and complicated steps to take in order to properly implement this strategy, without penalty.
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To help make the analysis easier, we have created the “Can I Make a Backdoor Roth IRA Contribution” flowchart. It addresses key considerations, including:
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Multiple retirement accounts
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Pro-rata and aggregation rules
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Step-transaction doctrine
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Step-by-step process for making a Backdoor Roth Contribution
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Making A Mega Backdoor Roth IRA Contribution
Can I Make A Mega Backdoor Roth IRA Contribution?
In certain cases, you may be eligible to make a Mega Backdoor Roth IRA contribution. At a high level, this involves you making a non-Roth, after-tax contribution to your 401(k), then rolling it out of your 401(k) into a Roth IRA. Under the right circumstances, this can allow you to contribute tens of thousands of dollars into a Roth IRA. However, the rules are very restrictive and prohibitive, and can be difficult to navigate.
To help make the analysis easier, we have created the “Can I Make A Contribution?” flowchart. It addresses some of the most common issues that arise for you who is trying to make a Mega Backdoor Roth IRA contribution. This flowchart considers:
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The maximum amount that can be contributed
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The impact of the ACP test
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401(k) plan-specific features providing in-service distributions and/or separate accounts
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The tax impact upon rollover
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The step-by-step process to complete this kind of contribution
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What is ACP Test
Actual Deferral & Actual Contribution Percentage Tests (ADP/ACP)
The Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests are two tests that companies must conduct to ensure that their 401(k) plans don’t unfairly benefit highly-paid employees at the expense of others.
Companies that offer 401(k) plans must conduct the tests in order to retain the qualified status of their plans under IRS rules and the (ERISA).
If the plan fails either test, the employer must take corrective action in the 12-month period following the close of the plan year in which the oversight occurred. Failure to do so can result in the IRS imposing pecuniary penalty fees, plan disqualification, and fiduciary liability on the part of the employer.
How ADP and ACP Tests Work
The ADP test compares the average salary deferral percentages of (HCE) to that of non-highly compensated employees (NHCE). An HCE is any employee who owns more than 5% interest in the company at any time during the current or previous plan year or earned more than $130,000 during the 2020 tax year.
The ADP test takes into account both pre-tax deferrals and after-tax Roth deferrals, but no catch-up contributions, which may be made only by employees age 50 and over. To pass the test, the ADP of the HCE may not exceed the ADP of the NHCE by more than two percentage points. In addition, the combined contributions of all HCEs may not be more than two times the percentage of NHCE contributions.
The ACP test uses a similar method as the ADP test except that it uses or employee .
Correcting an ADP/ACP Test Failure
When employers fail the ADP/ACP tests, they can remedy the failure by refunding excess contributions back to HCEs in the amount necessary to pass the test. However, these refunds will be liable for income tax for the HCE individuals.
Some companies set buffer zones within their plan documents to steer plans away from potentially failing the ADP/ACP test in the first place. One option is setting a cap on contributions by HCEs. Another option is to place a contribution limit on HCEs at the point where the plan would fail an ADP/ACP test. Setting plan buffer zones may require employers to conduct ADP/ACP test projections, typically in the middle of the plan year, to determine if any restrictions need to be applied.
Still, some companies use a 401(k) plan to avoid the ADP/ACP test entirely.
What Is a Safe Harbor Plan?
Safe Harbor 401(k) plans allow sponsors to bypass ADP/ACP and other non-discrimination testing in exchange for providing eligible matching or on behalf of their employees.
To qualify for Safe Harbor, a company must provide a basic match, such as a 100% match on the first 3% of deferred compensation and a 50% match on deferrals of 3% to 5%. They may also provide each employee with a nonelective contribution of at least 3% of compensation, regardless of how much the employee contributes or if they contribute at all.
Tax and Penalty-Free Distribution From My Roth IRA
Will A Distribution From My Roth IRA Be Tax and Penalty-Free? Some of you may have unique circumstances that could result in a distribution from a Roth IRA being taxed or penalized. Many of these situations rarely come up, which makes it hard to remember the usual distribution rules from a Roth IRA.
To help make this easier, we have created the “Will A Distribution From My Roth IRA Be Tax and Penalty-Free” flowchart. This flowchart helps to quickly identify circumstances that could have an impact on how a distribution is taxed (and penalized). It considers the following:
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The 5 Year Rule
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Impact of Roth conversions
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Distribution ordering rules
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Conditions that trigger the 10% early distribution penalty
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Exceptions to the 10% early distribution penalty
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