Utilizing Roths

Ashlea Ebeling recently published her article entitled Roths For the Rich, Forbes Magazine, Feb. 27, 2012. The article details one man’s use of a Roth account. An excerpt from the article is below:

As soon as Congress created the Roth individual retirement account in 1997, Dennis Frailey wanted one. He saw immediately how a Roth, which allows money to grow and be withdrawn tax free, could help him manage his tax bill in retirement. “In my alternative life I should have been a financial planner,’’ says Frailey, a 67-year-old Ph.D. software engineer who since 1980 has used his own spreadsheets to track his spending, investments and taxes and to pro­ject his retirement income.

Just one hitch: Congress decreed highly paid workers couldn’t contribute to Roth IRAs, and Frailey always earned too much from his job at Raytheon ( RTN – news – people ) in Plano, Tex. to qualify. (Now retired from the corporate world, he teaches part time at Southern Methodist University.)

Fifteen years later high earners still can’t make annual contributions to Roth IRAs–directly. But today they can shovel as much as $12,000 in 2011 and 2012 contributions per person into Roth IRAs by dancing a little two-step through the Roth’s back door.

First, they must contribute aftertax money to a traditional IRA. Then they can move that money into a Roth through a “conversion.” This works ­because Congress, in its wisdom, ended income limits on Roth conversions as of 2010 while leaving income limits on contributions in place. Frailey himself did a backdoor Roth in 2010, the first year it was allowed (and his last year at Raytheon). His wife, Anne, 60, a software engineer for the federal government, is now making backdoor Roth contributions. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.