With a normal clandestine Roth IRA, you owe income taxes on the amount of money you converted into a Roth IRA, to the extent that your traditional IRA holdings were initially deductible. 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. When you withdraw funds from an IRA before age 59 and a half, you may have to pay ordinary income tax plus a 10% federal penalty. If you have one or more IRAs that you've funded with deductible contributions, even the clandestine strategy can't stop you from owing taxes for a conversion to Roth.
To harness the powers of the enormous clandestine Roth IRA, first consider taking full advantage of your other retirement savings options. In addition, a large clandestine Roth IRA can avoid the taxable event that usually results in a normal conversion to a clandestine Roth IRA. As with all retirement savings, the amount you can contribute to a clandestine Roth IRA is limited each year. A clandestine Roth IRA is not a type of retirement account, but rather a strategy for converting funds from a traditional IRA or 401 (k) into a Roth IRA.
This table shows if your contribution to a Roth IRA is affected by the amount of your modified AGI as calculated for the Roth IRA. However, if you meet the income and savings requirements, a clandestine Roth IRA is an excellent way to diversify your retirement income, as it allows you to earn tax-deferred income (subject to tax at the time of withdrawal) on your pre-tax contributions and tax-free income on your after-tax contributions (if the funds are transferred to a Roth IRA). Otherwise, the amount included in the income is calculated as if you were withdrawing money from a traditional IRA. If you or your spouse participate in a traditional qualified retirement plan at work that accepts the renewal of pre-tax (deductible) IRA balances, then you have another way to avoid taxes if you use the clandestine strategy to fund a Roth.
Only investment gains from after-tax contributions are taxed at the current income tax rate at the time of retirement to be deposited in your Roth IRA. When comparing these two options, you'll want to understand the implications and rules of traditional and Roth IRA contributions. Investing in a Roth IRA is a great way to save for the future, as it will generate tax-free income during retirement. A large clandestine Roth IRA uses the same conversion technique, but could significantly reduce or eliminate the tax liability for the conversion.