Not Eligible For a Roth IRA

A Twitter listener asks what to do if you earn too much to contribute to a Roth IRA or get a deduction from a traditional IRA. Dave explains an action that they can take before the end of this year.

QUESTION: A Twitter listener asks what to do if you earn too much to contribute to a Roth IRA or get a deduction from a traditional IRA. Dave explains an action that they can take before the end of this year.

ANSWER: Well, you evil rich person, you! You should be ashamed of yourself. That’s what the tax code just said. We don’t want people who have made money to save money, so I can’t do a Roth IRA either.

What you can do is you actually can do a traditional IRA and not look for the deduction, and you’re allowed to convert it to a Roth IRA this year. Next year, you won’t be able to do that because the evil Bush tax cuts are going to expire unless Congress acts, and they’ve probably not got the backbone to act.

The second thing you can do is if you’re self-employed, you can do a SEPP (simplified employee pension plan). Check that out as a possibility. It’s got some limitations and things to it that make it not attractive in some situations, but it’s possible.

You also—if you own your own company—could start a simple 401(k), which you’re allowed to do. A simple IRA is a 401(k) for small companies, but you’re again limited as to how much you can put into that depending on the other members of your firm and so forth. That’s something to check out.

Lastly, you buy things that are capital-gains-oriented as opposed to annual-income-oriented. If it makes money this year and you’re trying to save it for the future, you have to pay ordinary income on the income. If it grows in value, you don’t have to pay until you sell it. That’s a capital gains thing. That would be something like purchasing real estate. As it grows in value, you don’t have to pay taxes on the growth until you sell it. If you never sell it, you never pay taxes on the growth. That’s a tax-deferred investment. The same thing would be true if you bought stock and held it or if you bought a mutual fund like a good growth stock mutual fund that had a low turnover ratio, meaning they don’t sell the stock inside the mutual fund very often. That allows you to have the growth of that fund with virtually no taxes. That’s a great way to do it as well.

You’re just limited because you’re one of those evil rich people.