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Why do you think high earners are ineligible for Roth IRA? For Married filing jointly, contribution limit begins to phase out at combined income of 181K. There is some logic to most of the IRS rules and limits, but I don't understand this one.
You are not taking tax advantage of Roth IRA until after you start withdrawing, it is funded with after tax money, so these high earners are not reducing their tax liability by contributing to Roth. What am I missing?
I don't know, but it's a moot point because high earners CAN deposit money in a Roth IRA. Google "backdoor Roth" for more details.
Frankly, I think they should drop the pretense of Roth ineligibility and just let everyone fund one directly, regardless of their income level. We don't exactly have a problem of folks saving TOO much money for retirement in this country, so why make it tougher?
I don't know, but it's a moot point because high earners CAN deposit money in a Roth IRA. Google "backdoor Roth" for more details.
Frankly, I think they should drop the pretense of Roth ineligibility and just let everyone fund one directly, regardless of their income level. We don't exactly have a problem of folks saving TOO much money for retirement in this country, so why make it tougher?
Yes, I'm aware of backdoor conversion, and I can't understand how making people jump through the hoops benefits anybody. Except you file more paperwork with IRS, which burdens its employees.
The IRS does not make tax law, Congress does. Congress eliminated the income limit on traditional to Roth conversions because they wanted some of that deferred tax revenue right now. Why didn't they change other rules to line up with no income limit on conversions? Who knows. Maybe they intend to put a limit back in place at some point. But we have new people every 2 years, so who knows what some future Congress will decide to do.
Trying to make sense of tax laws is a fruitless exercise. Spare yourself the aggravation.
The IRS does not make tax law, Congress does. Congress eliminated the income limit on traditional to Roth conversions because they wanted some of that deferred tax revenue right now. Why didn't they change other rules to line up with no income limit on conversions? Who knows. Maybe they intend to put a limit back in place at some point. But we have new people every 2 years, so who knows what some future Congress will decide to do.
Trying to make sense of tax laws is a fruitless exercise. Spare yourself the aggravation.
There is a proposal to slam shut the backdoor Roth route and to limit total balances in tax deferred accounts. Why are there limits? The govt doesn't want to cutoff more of its funding, excluding people from roths will induce more income from dividends, interest and capital gains
Usually, whether the reasoning is good or bad, there is reasoning behind tax policy. Some brief googling hasn't led me to find the reasoning behind income limits on a ROTH.
if i were to speculate, I would speculate that it's because a ROTH doesn't have forced withdraw requirements like an IRA and 401k do, which makes it easier to leave the ROTH account to your heirs. So maybe Congress recognized this in 1997 when it created the ROTH provision, and wanted to put a control in place to prevent more affluent individuals from using this as a way to leave money to their heirs and avoid the inheritance tax?
Usually, whether the reasoning is good or bad, there is reasoning behind tax policy. Some brief googling hasn't led me to find the reasoning behind income limits on a ROTH.
if i were to speculate, I would speculate that it's because a ROTH doesn't have forced withdraw requirements like an IRA and 401k do, which makes it easier to leave the ROTH account to your heirs. So maybe Congress recognized this in 1997 when it created the ROTH provision, and wanted to put a control in place to prevent more affluent individuals from using this as a way to leave money to their heirs and avoid the inheritance tax?
That's the best guess I can come up with.
Roths would still be subject to estate taxation. However, note that under current law a married couple generally needs to be worth over $10 million to have any federal estate tax issues.
I think the bigger issue is that, as you note, Roths don't have RMDs during the owner's lifetime, so if you accumulate a boatload in it you can let it sit and leave it to your heirs when you die. If you leave it to your grandkids, their RMDs will generally be a very low percentage for a number of years, thus allowing the funds to be stretched out (and allowed to grow) that much longer.
In addition, "creative" valuation of certain assets transferred into Roths can allow for tremendous income tax sheltering.
Granted, as others have noted you can do Roth conversions, which kinda defeats the purpose of the income limitation on contributions. I'd note that there used to be an income cap that disallowed conversions, but that was removed just a few years ago (2013? I'd have to look it up).
Circular 230 Disclaimer - I may be a morot. Relying on anything I say or type is a stupid idea and won't hold water with the IRS. Talk to real people rather than take the word of imaginary ones on Teh Internet.
Granted, as others have noted you can do Roth conversions, which kinda defeats
the purpose of the income limitation on contributions. I'd note that there used
to be an income cap that disallowed conversions, but that was removed just a few
years ago (2013? I'd have to look it up).
2010 was the first year there were no income limits to convert.
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