If a person with a high income decides to make a contribution to an IRA, the contribution cannot be made to a Roth IRA. Instead, it should be done to a traditional IRA. Let's suppose that, in the situation of this person who earns, the contribution is not tax-deductible. Once the funds are in the IRA, they will grow tax-deferred until they are withdrawn.
At the time of withdrawal, if the IRA has gained value, part of the distribution will be a tax-free tax return and the rest will be taxed at the beneficiary's current income tax rate. Under the prorated rule, IRA account conversions are taxed in proportion to the amount of taxable contributions from all of your IRA balances. With a clandestine Roth IRA, a person makes a non-deductible contribution to a traditional IRA and then converts that account into a Roth IRA. However, if your traditional IRA is primarily comprised of pre-tax contributions, it may not make sense to convert it to a Roth IRA if you incur a large tax liability.
Before you start making taxable contributions to the 401 (k) plan, make sure you make the most of your other tax-advantaged accounts, such as your IRA or Roth IRA. Your actions and circumstances are identical to those of the first situation, except that you also have a traditional IRA reinvestment account that was fully funded by deductible contributions. As of last year, there are no income restrictions on converting your traditional IRA to a Roth IRA. The federal government says you can convert a traditional IRA to a Roth IRA regardless of your income.