Question

Magdalene works for a publishing company and earns 200,000 per year, while also participating in the company's generous 401(k) plan. She is convinced that she will eventually become very healthy by writing a series of young adult novels about two vampires who fall in love in a dystopian, post-apocalypic future. Since she expects her future tax rate to be high, she has asked you if she can set up a Roth IRA to start making contribution immediately. What is your repsonse? (Please give an answer of at least 3 sentences)

Answer 1

1. Roth IRA's are individual retirement accounts that offer tax free withdrawals after retirement and other valuable tax free benefits. They are best if you are expecting a higher tax rate in the future.

2. To contribute to a Roth IRA you must have an income from work but if your income is too high, you will not be eligible for a Roth.

3. In the case of Magdalene, the income limits get applied to her annual income as it is in excess of the limit (i.e.,assuming she is single, $124,000 Modified Adjusted Gross Income as of year 2020) mentioned.

4. The other viable option for Magdalene would be to set up a traditional IRA, and then convert it into Roth IRA in the future. This strategy is for high income earners and serves as a "back door" to Roth IRA