Q. I earned too much in 2013 to contribute to a Roth IRA. Can I contribute to a traditional IRA for 2013 and immediately convert it to a Roth? Do I have to pay taxes on the conversion?
A. Your plan is a perfectly legal backdoor entry to a Roth IRA. For 2013, direct Roth contributions are banned for singles with adjusted gross income over $127,000 and couples filing a joint return reporting AGI over $188,000. But there's no income limit on contributions to a traditional IRA or for converting one to a Roth. You have until April 15, 2014, to contribute up to $5,500 to a IRA for 2013 (or up to $6,500 if you were 50 or older in 2013).
There's no legal requirement for how long the money needs to be in the traditional IRA before moving it to a Roth. But Ken Hevert, vice-president of retirement products for Fidelity, notes that it could take a few days before the money is available for the rollover. Check with the traditional IRA sponsor about timing.
Jim Blankenship, a certified financial planner in New Berlin, Ill., generally advises clients to wait at least a few days for recordkeeping purposes (and even as long as a month) %VIRTUAL-article-sponsoredlinks%before making the conversion. If the contribution and the conversion are on separate monthly statements, he says, it is clear that the original contribution was to a traditional IRA rather than a Roth.
The tax issue is trickier. I'll assume you make a nondeductible contribution to the traditional IRA (if you or your spouse have a retirement plan at work, the fact that your income is too high for a Roth means it's also too high to deduct contributions to a traditional IRA). If the new contribution is the first and only money you have put in a traditional IRA, you'll owe tax only on any earnings between the time of the contribution and the conversion. But if you have other money in traditional IRAs, your tax bill will be based on the ratio of your nondeductible contribution to the total balance in all of your traditional IRAs.
So if you make a nondeductible contribution of $5,500 this year and that brings your total in traditional IRAs to $50,000, converting $5,500 to a Roth would trigger a tax on $4,985. Because $5,500 is 11 percent of $50,000, 11 percent of the conversion ($605) is considered tax-free; the other 89 percent ($4,985) is considered pretax money moving from your traditional IRAs to the Roth. If you convert the traditional IRA to a Roth now, you'll report the conversion on your 2014 return next spring. After the conversion, the money grows tax-free in the Roth.
Creating an emergency savings fund can prevent you from relying on a credit card and going into debt when unexpected costs strike, says "Today" show financial editor Jean Chatzky. "You've got to watch it with the debt," she warns, adding that half of Americans lack emergency funds. "Lack of savings and debt go hand in hand ... an emergency cushion is insurance against debt," she says.
"Insurance is always that thing that we don't think about that we should," Chatzky says. Rental insurance and disability insurance both tend to be "chronically under-bought," but taking out policies can end up saving you from financial catastrophe, she adds. She recommends looking into policies offered through work because they can be more affordable.
Automating your retirement savings -- having money taken out of your paycheck and put into a tax-advantaged retirement account -- makes it easier to save without thinking too much about it, Chatzky says. Since many companies' automatic opt-in programs start at 3 percent of income, you might need to scale it up yourself, and Chatzky says if you do it in 2 percent increments, you might not even notice the difference.
While some people prefer to manage their money on their own, others benefit from a professional's help. "It's easy to feel overwhelmed by all of the competing expenses," says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial (AMP). "Sitting down with a financial adviser can help you understand where your expenses are and what is discretionary versus essential, and then you can create the right kind of budgeting and savings plan for you."
Kathleen Grace, a certified financial planner and author of "Prince Not So Charming," says maintaining excellent credit is important as you progress through your 30s, particularly because your credit report can play a big role when it comes to determining how much you will pay to borrow money for big expenses like a mortgage. She suggests reviewing your credit report once a year to check for errors and paying off your credit card balance in full each month.
Learning the ins and outs of income taxes, including any tax deductions and credits that might apply to you, can help you save a few hundred, or even a few thousand, dollars each year, says certified financial planner Nancy L. Anderson. Those amounts can add up over a lifetime, she adds.
This move isn't right for everyone, but it is a smart investment for many 30-somethings, says Bart Astor, author of "AARP Roadmap for the Rest of Your Life." Despite the flux in the real estate market, "it's still a good idea for a young person or family. It brings stability," he says. And over time, the investment should grow.
Many companies provide an additional 30 percent of pay in terms of employee benefits, Anderson says. Those benefits include retirement, tuition reimbursement, pretax transportation benefits, health savings accounts, employee assistance programs, wellness programs, financial planning and more. Since your company is already paying for those benefits, you can take advantage of them to help boost your own wealth.
"The single most important financial move you can make in your 30s if you have minor children is to put the time, effort and money necessary into drafting solid estate planning documents," says Tim Maurer, director of personal finance for the BAM Alliance of independent advisers. They should be written by an attorney who specializes in estate planning and include advance directives, a durable power of attorney and most importantly, a will.
You don't need to become a financial professional, but knowing your way around the stock market will help you make the right decisions for your own long-term savings and investments. Money and retirement expert Kerry Hannon recommends smartaboutmoney.org, by the National Endowment for Financial Education, for free guides on stocks, bonds and mutual funds. She also suggests taking a personal finance course at a local community college.
This decade is also the time to make slow and steady progress toward paying off any remaining student loan debts, as well as unloading any expensive credit card and other types of debt. Hannon even opted to cash in her 401(k) plan at age 30 to help pay off her credit card debt, which isn't necessarily the right choice for everyone. Still, becoming debt-free by age 40 is definitely something to celebrate.