Roth Rollover FICA Saving Tax Strategy

Rules regarding a from a traditional IRA to a Roth IRA heaven interesting side effect. They provide you with a mechanism to avoid paying FICA and Social Security tax. When you put money into higher rate can be done before taxes. There’s a particular true if your company puts money into an IRA for you. Money put into the IRA is tax-deductible to the company and is not taxable to you. This means that there are no FICA or so security taxes paid on the amount put into the IRA. Further it means that the employers portion of these taxes are not paid on that amount as well.

Once the money is in a traditional IRA a can be rolled over to a Roth IRA and taxes must be paid on it. However the rules up here to only charge income tax on the amount rolled over. You are not subject to fight for Social Security tax on the amount rolled over. Even if you were it appears that the company portion of these taxes would not be charged. For many people this amounts to about 15% of the total amount so it is significant.

Here’s the trick though. When you roll money over from a traditional IRA to a Roth IRA you pay taxes on the amount but to roll over. With a Roth IRA that you contribute to directly with after-tax dollars you can immediately turn around to withdraw the amount originally invested. However when the funds were rolled over from a traditional IRA there is a five-year waiting period in order to withdraw the money without any sort of fee.

If your company contributes $5000 to a traditional IRA on your behalf in 2010 and you roll it over to a Roth IRA in 2011 you can take the $5000 out in 2016 without any sort of tax or penalty. If you plan your income wisely you may be able to roll the traditional IRA over to a Roth IRA in years when you have less income and us pay less taxes on the rollover amount. Either way when the $5000 is free for you to take back out you will be saving approximately $750 in taxes that would need to be paid otherwise.

Obviously this is a long-term strategy and you should talk to your accountant or CPA to make sure you understand all of the ins and outs. However it does give you a way to save money on taxes on at least a portion of your income if you make under the amount it requires your entire income to be subject to FICA tax.

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