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Roths for the Rest of Us

Here are nine less conventional ways to enjoy the benefits of Roth accounts.

Imagine an investment account with no income tax whacking the returns. There is such a thing. It's called a Roth account. Here's a list of nine safe, legal ways to acquire a Roth retirement account--without a costly conversion of your existing traditional plans. 

These are thumbnail sketches to spur thinking. See disclaimers and resources at the end to follow up. All dollar limits are for 2017.

  1. If you work for a company that has a 401(k) plan, the tax code permits employees to have up to $18,000 ($24,000 if 50 or older) withheld from their paycheck and contributed directly to the 401(k) plan. This is called a "cash or deferred arrangement." If permitted by your company's plan, the CODA contribution can be made to a traditional pretax account (so you don't pay tax on it the year it's contributed; this is attractive if you're in a high bracket) or to a designated Roth account where you'll pay tax on the contribution, but future qualified distributions will be tax-free.
  2. If your company's plan allows DRACs, find out if it also permits voluntary nondeductible employee contributions. If allowed and you are within applicable contribution limits, make a nondeductible contribution, then do an "in-plan conversion" to convert the after-tax contribution into the designated Roth account.
  3. If you have adjusted gross income under $133,000/$196,000 and compensation income (compensation income includes salary, wages, tips, taxable alimony and combat pay), you can contribute $5,500 to a Roth IRA ($6,500 if 50 or older), if your modified adjusted gross income is less than $118,000 (single) or less than $186,000 (married filing jointly). You can contribute a reduced amount if your adjusted gross income is between $118,000 and $133,000 (single) or between $186,000 and $196,000 (married filing jointly). In either case, your contribution may not exceed your compensation income.
  4. If your modified adjusted gross income is too high to contribute directly to a Roth IRA and you will not be 70 1/2 or older in 2017, you can make a nondeductible contribution to a traditional IRA of $5,500 ($6,500 if 50 or older) that's not more than your compensation income, then convert the IRA to a Roth. The conversion will be all or mostly nontaxable if you have no other traditional IRAs.
  5. If you have after-tax money in your company's qualified plan and are entitled to take a distribution from the plan (e.g.,because you are retiring), you can open a traditional IRA and a Roth IRA (if you don't have such accounts already). You direct the plan administrator to send the after-tax money from your plan account via direct rollover to the Roth IRA (tax-free Roth conversion), and to send the pretax money from your plan account via direct rollover to the traditional IRA (traditional tax-free rollover).
  6. If you inherited a 401(k) or other qualified retirement plan directly as named "designated beneficiary" (not through an estate) and your deceased benefactor had after-tax money in the plan, you can open a new traditional "inherited IRA" account and a new "inherited Roth IRA" account. You direct the plan administrator to send the after-tax money from your inherited plan account via direct rollover to the inherited Roth IRA (tax-free Roth conversion), and the pretax money from the inherited plan account via direct rollover to the inherited traditional IRA (traditional tax-free rollover). Or convert it all to the inherited Roth IRA if income tax on the conversion would be low (perhaps due to a large 691(c) deduction).
  7. If you have a traditional IRA that has after-tax money in it and you also participate in a qualified retirement plan that accepts rollovers from IRAs, you can roll the pretax portion of your IRA accounts (all your traditional IRA accounts--multiple IRAs are considered one account for income tax purposes) into the qualified plan. This leaves your traditional IRA holding nothing but after-tax money. You convert the traditional IRA to a Roth IRA, tax-free. Do not roll money into or otherwise contribute to any traditional IRA for the rest of the calendar year.
  8. If you are self-employed with no employees, determine your "net self-employment income" (Schedule C net profit reduced by the deductible portion of the self-employment tax). Now adopt a "solo 401(k) plan" that allows designated Roth accounts and voluntary nondeductible employee contributions. You can do a CODA contribution of up to $18,000 ($24,000 if 50 or older), or up to your total net self-employment income if less, to either a regular traditional 401(k) account (if you want to reduce current taxes) or a designated Roth account.
  9. You can also (subject to applicable dollar/percentage contribution limits) make additional voluntary nondeductible contributions and then convert them to the Roth account (in-plan conversion).

You can't take the above ideas to the bank. Instead take them to your tax advisor to figure out which idea(s) might work for you. For example, though the code permits total annual qualified retirement plan contributions up to 25% of  compensation (the CODA contribution is not subject to that limit) or (if less) $54,000 ($60,000 if 50 or older) (including the CODA contribution), your employer's plan may impose lower limits. Also, the CODA dollar limit applies per individual not per plan. So don't try this at home--consult a tax expert!

Where to read more: For aspects of Roth accounts and conversions, see Chapter 5 of Natalie Choate's book, Life and Death Planning for Retirement Benefits,( For income and contribution limits applicable to Roth IRAs, see Appleby's IRA Quick Reference Guides (2017), Major mutual fund families offer "solo" or "individual" 401(k) plans with or without designated Roth options; see their websites.

Now available in electronic edition! By popular demand, Natalie Choate's book, Life and Death Planning for Retirement Benefits, has been published in an electronic version. The e-book edition gives you the entire book in word-searchable format, plus two chapters (on life insurance and annuities in retirement plans). Live links to cross-referenced book sections and most cited tax sources. Access anywhere you have an Internet connection. Visit to subscribe or learn more.