A conversion can turn you into a Roth IRA even if your income is too high. The conversion would be part of a two-step process, often referred to as a clandestine strategy. First, place your contribution in a traditional IRA that has no income limits. Then, transfer the money to a Roth IRA through a conversion to Roth.
A clandestine Roth IRA is a type of conversion that allows people with high incomes to fund a Roth despite IRS income limits. However, there is a second five-year rule for clandestine conversions to Roth. Since a clandestine Roth IRA is classified as a conversion and not a contribution, you cannot access any of the funds in the converted Roth IRA without penalty for the first five years after the conversion. The main advantage of a clandestine Roth IRA, as with Roth IRAs in general, is that you pay taxes in advance on funds converted before taxes and, after that, everything is tax-free.
When trying to make a clandestine conversion to a Roth IRA, you should consider the peculiarities of IRAs and some special tax considerations. In practice, this means that you can owe taxes on the money you intend to use for a clandestine conversion to a Roth IRA, even if the money has already been taxed. There are no income thresholds that limit who can make non-deductible contributions to the IRA, although you must still meet the annual IRA contribution limits. Some taxpayers who are not eligible to deduct IRA contributions use after-tax money to fund a traditional IRA and repay taxes when they withdraw money from the account just to have an IRA.
Remember that when you transfer an IRA or convert it to a Roth IRA, you'll have to pay taxes on any money in your traditional IRA that isn't taxable. That means you must wait five years to get penalty-free access to your clandestine Roth IRA funds if you're under 59 and a half years old. However, a clandestine Roth IRA is more useful for those who make a lot of money, since access to an employment retirement plan prevents them from deducting their contributions to the traditional IRA in the first place. The clandestine Roth strategy can be beneficial if you earn too much to contribute to a Roth IRA or if you have determined that a Roth IRA is better for your retirement.
The process can be a relatively simple transfer between the same trustee if your traditional IRA and your Roth IRA are with the same account provider. Another reason is that a clandestine contribution to Roth can mean significant tax savings over decades, since Roth IRA distributions, unlike traditional IRA distributions, are not subject to taxation. In the future, Roth IRA distributions will also be tax-exempt, as long as you are 59 and a half years old and have held the Roth for at least five years (note that each conversion amount is subject to its own five-year retention period when it comes to tax-free withdrawals). A trustee to trustee transfer, in which the traditional IRA provider sends money directly to their Roth IRA provider.
So, if you deducted your contributions to your traditional IRA and then decide to convert your traditional IRA into a clandestine Roth, you'll have to repay that tax deduction. Most brokerage firms can help you manage a Roth IRA conversion, especially if you opened your traditional IRA with them.