boost ira roth conversionI recently had some clients ask about a ROTH IRA. They are a married couple earning $300,000 a year and want to invest in real estate with their IRA. Their goal is to have income, cash flow and the potential for appreciation should the IRA opt to sell later. The question was how to do this transaction in a ROTH IRA when they earn more than allowed to make contributions to one.

Understanding the difference between a Traditional IRA and a ROTH IRA is easy.

The Traditional IRA is tax-deferred, meaning that contributions are made with before tax dollars. When one starts to take distributions on a Traditional IRA, he will pay tax at his current income tax rate. It is assumed that this will be lower than when he was earning higher wages.

With the ROTH IRA, these contributions are made with after tax dollars, so the account grows completely tax-free. In 2010 the rules for conversions from a traditional IRA to a ROTH changed; and anyone, regardless of income level, is eligible to convert their assets from an existing Traditional IRA to a ROTH.

Confused? Conversion and Contributions are two different things.

In 2014, ROTH IRA Contribution limits will vary depending on your filing status, income level and age. IRS Publication 590 spells out qualifications for ROTH contributions. These limits can be especially confusing if you are a high-income earner. IRA Innovations does not provide tax advice. Therefore, we always recommend that you consult with your accountant or trusted financial adviser.

However, a conversion from a Traditional IRA to a ROTH IRA has NO limits. What does this mean? If your earnings do not qualify you to make a contribution to a ROTH IRA, you could qualify to make a contribution to your existing Traditional IRA and then convert those contributions to a ROTH.

Making a non-deductible contribution to a Traditional IRA then doing the conversion to a ROTH IRA is a lot like making a ROTH IRA contribution. There are no income limits on ROTH conversions in 2014. You will pay the tax when you convert, but the account grows tax-free after that.

It is important to understand the difference between these accounts, and get the proper advice from your financial professional. Each individual has a unique situation, which is why guidance is necessary.

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