Don’t Overlook a Roth IRA if You Are Self-Employed

Robert HobermanManaging Partner, Hoberman & Lesser CPAs, LLP

Saving for retirement on a tax-advantaged basis should be on nearly everyone’s financial “to do” list, though in this current economic crisis, you may need to put it on the back burner for a time.

Making contributions to a Roth IRA is one tax-wise way to save, because you can take withdrawals after age 59 1/2 that are free from federal income tax, assuming you’ve had at least one Roth account open for more than five years. Of course, Roth contributions are nondeductible, but they are valuable because you reap tax savings on the back end of the deal.

However, if you’re self-employed and fairly affluent, you may have dismissed the idea for two reasons:

1. You figure your income is too high to qualify for Roth contributions.

2. You figure a Roth IRA is not that attractive because you believe you’re in a higher tax bracket now than you’ll be in during retirement. Instead, you make maximum deductible contributions to a traditional tax deferred retirement arrangement such as a simplified employee pension (SEP) plan, solo 401(k), or a defined contribution or defined benefit Keogh plan.
In this article, we’ll examine why both assumptions may be wrong and why a Roth IRA is a smart way to build a substantial federal-income-tax-free retirement fund — even if you have another retirement plan.

Think Your Income Is Too High? You May Be Wrong

It’s true that the ability to make Roth IRA contributions is phased out, or completely eliminated, if your modified adjusted gross income (MAGI) exceeds certain levels. For 2020, the phase-outs start at the amounts listed below. MAGI is the adjusted gross income (AGI) amount reported on the bottom of page one of your Form 1040 with certain add-backs that may or may not apply in your situation.