Retirement · July 09, 2020

Alternate Ways to Fund a Roth IRA

Saving for retirement with a Roth IRA is a smart move, especially if you expect your tax rate in retirement to be higher than your current tax rate. That’s because with a Roth IRA, you pay current taxes on contributions and your withdrawals from qualified earnings are tax-free.

Unfortunately, many individuals are prevented from directly contributing to a Roth IRA because their income is too high. Many believe that a Traditional IRA funded with pre-tax dollars is their only option. However, there’s another option to contribute to a Roth. The “Backdoor” Roth IRA strategy can be a viable alternative to save and invest for retirement.

How it works

Using this strategy, you can make a contribution to a Traditional IRA and convert the funds to move them to a Roth IRA.

After the conversion, withdrawals from earnings are tax freeD if you’ve owned the Roth IRA for 5 years or longer and are over 59 ½. You can also remove your original contributions, which are tax free at any age. If your Roth IRA has been open for 5 years or longer but you are under 59 ½, you can remove earnings tax free if the withdrawal is due to disability, first time home purchase or if you’re a beneficiary that’s inherited the Roth IRAD.

This strategy offers these advantages:

Roth IRA income limits don’t apply to conversions
Conversions aren’t considered contributions, so the annual Roth contribution limits don’t apply
There’s no limit on the number of times you can convert funds from a Traditional IRA to a Roth IRA
Annual maximums for tax-qualified IRA contributions are still applicable, however, there is no dollar maximum for how much you can convert in a year

Here’s an example

The conversion begins with the distribution of all or a portion of your funds in existing Traditional IRAs into a Roth IRA. Within your Traditional IRA you may have pre-tax dollars as a result of rollovers from a retirement plan or tax-deductible contributions or earnings. However, your Traditional IRA could also include after-tax dollars if you’ve made any nondeductible contributions. The tax liability on a conversion will be based on the percentage of your overall balance that hasn’t been taxed yet. This example is based on converting funds from a single Traditional IRA:

John has $200,000 in his Traditional IRA, including $20,000 (10%) in after-tax money. He wants to convert

$40,000 into a Roth IRA using the backdoor strategy. According to federal guidelines, $4,000 ($40,000 x 10%) will be converted tax-free, and John will owe current taxes on the remaining $36,000. Once John qualifies, he could withdraw future earnings tax-free.

The IRS aggregation rule requires that all IRAs must be aggregated when calculating the tax consequences of a distribution from any of them. To determine if a tax-free conversion can occur, please consult your tax advisor.

Important considerations

The backdoor conversion strategy may fit well with your financial plan. As you think through your options, it’s important to:

Know the difference. Are your Traditional IRA retirement funds before-tax or after-tax dollars? Only after-tax money moves tax-free. Current income taxes must be paid on any pre-tax money converted to a Roth IRA.
Realize you can’t undo it. No recharacterizations are available. Once you execute a conversion from a Traditional IRA to a Roth IRA, you’re not allowed to undo the transaction.
Understand the five-year rule. A conversion must remain intact for at least five years before a tax-free withdrawal can be made from the Roth IRA. The five-year period begins at conversion.
Pass the age rule to withdraw funds. To withdraw Roth IRA funds tax-free, you must be over 59½ years old.
Avoid penalties. You could be subject to a 10% early distribution penalty if you withdraw money from the Roth IRA before meeting the age and five-year rules.

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Withdrawals are not subject to federal taxes, and may not be subject to state taxes based on current state laws.

IRS Publication 590. Always consult with your tax advisor for tax advice.

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Earning Points

Accelerated Rewards Tier: Earns one and a half (1.5) points for each dollar you spend for net retail purchases (gross retail purchases less any returns or credits).

There is no monthly point cap and points do not expire as long as you remain in the Accelerated Rewards Tier.

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Businesses in the Accelerated Rewards Tier may redeem points for (i) cash back to a First Citizens checking or savings account or credit card statement credits, (ii) credit towards a First Citizens personal loan or mortgage principal, (iii) Pay Me Back statement credits, (iv) travel rewards, including airline tickets, hotel, car rentals, cruises and tours, (v) retail gift cards and certificates and (vi) merchandise and (vii) donations. Businesses in the Accelerated Rewards Tier have access to additional experiential rewards and a fixed point value airline travel reward.

These Terms are only a summary. Other restrictions and requirements apply. The full First Citizens Rewards® Program Rules will be provided upon enrollment and are accessible via the program website at FirstCitizensRewards.com at log in.

Program Rules are subject to change or cancellation without notice.

Bonus Offer

Offer is valid on new accounts only. To qualify, company must spend $3,000 within the first three months of account opening to receive the bonus. $100 rewards dollars will be credited within 60 days of qualification under the description: Commercial Spend Bonus.

Earning Cash Back

Cash Back Rewards: Earns (i) one (1) reward dollar for each one hundred (100) dollars you spend for net retail purchases (gross retail purchases less any returns or credits), (ii) five (5) reward dollars for each one hundred (100) dollars you spend for net retail purchases in the following rewards categories: utilities and wireless phone (4 additional reward dollars on top of the 1 reward dollar for each one hundred dollars earned on net retail purchases) for the first twelve (12) months from account opening; three (3) reward dollars for each one hundred (100) dollars you spend for net retail purchases thereafter (2 additional reward dollars on top of the 1 reward dollar for each one hundred dollars earned on net retail purchases), (iii) two (2) reward dollars for each one hundred (100) dollars you spend for net retail purchases in the follow rewards categories: gas and office supplies (1 additional rewards dollars on top of the 1 reward dollar for each one hundred dollars earned on net retail purchases).

Rewards Categories: Merchants who accept Visa credit cards are assigned a merchant code, which is determined by the merchant or its processor in accordance with Visa procedures based on the kinds of products and services they primarily sell. We group similar merchant codes into categories for purposes of making reward offers to you. We make every effort to include all relevant merchant codes in our rewards categories. However, even though a merchant or some of the items that it sells may appear to fit within a rewards category, the merchant may not have a merchant code in that category. When this occurs, purchases with that merchant won't qualify for rewards offers on purchases in that category.

There is no monthly point cap. Reward dollars earned are available for redemption for a 3-year term. Reward dollars expiring during the year will be cleared from the Program Account on the last day of the month in which they expire.

Rewards Redemption

Businesses may redeem reward dollars for (i) cash back to a First Citizens checking or savings account or credit card statement credits and (ii) Pay Me Back statement credits.

Program Rules are subject to change or cancellation without notice.

Bonus Offer

Offer is valid on new accounts only. To qualify, company must spend $3,000 within the first three months of account opening to receive the bonus. 10,000 bonus points will be credited within 60 days of qualification under the description: Commercial Spend Bonus.

Earning Points

Base Rewards Tier: Earns (i) one (1) point for each dollar you spend for net retail purchases (gross retail purchases less any returns or credits), (ii) three (3) points for each dollar you spend for net retail purchases in the follow rewards category: gas stations (2 additional points on top of the 1 point per dollar earned on net retail purchases), (iii) two (2) points for each dollar you spend for net retail purchases in the following rewards categories: restaurants and travel (airlines, auto rental, and lodging) (1 additional point on top of the 1 point per dollar earned on net retail purchases).

Businesses may earn up to 10,000 points per calendar month, excluding bonus points. Points earned are available for redemption for a 3 year term. Points expiring during the year will be cleared from the Program Account on the last day of the month in which they expire.

Rewards Redemption

Businesses in the Base Rewards Tier may redeem points for (i) cash back to a First Citizens checking or savings account or credit card statement credits, (ii) credit towards a First Citizens personal loan or mortgage principal, (iii) Pay Me Back statement credits, (iv) travel rewards, including airline tickets, hotel, car rentals, cruises and tours, (v) retail gift cards and certificates and (vi) merchandise and (vii) donations.

Program Rules are subject to change or cancellation without notice.

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You may redeem points back into other First Citizens banking products:

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Cash back and account credit redemptions must be completed through the Program website, however a statement credit back to your First Citizens Card can also be redeemed through the First Citizens Rewards Call Center. The redemptions will post within 2-8 business days. No First Citizens card or mortgage account credit will be applied, in whole or in part, against any monthly minimum payment due, however, account credits to your First Citizens consumer loan will be applied first to your outstanding interest and any remaining amount will be applied to your principal.

Cardholders in the Accelerated Rewards Tier may redeem 50,000 points for one continental flight when the flight is booked at least 21 days in advance and includes a Saturday night stay. This reward is only available for redemption on coach tickets priced below $1,000.00. Tickets priced above $1,000.00 are not eligible for this reward.

Redemptions are also available for travel, including airline tickets, hotel, car rentals, cruises and tours, retail gift cards and certificates, donations and merchandise.

You may use points for a Pay Me Back® redemption, meaning a statement credit for the corresponding dollar amount will be applied to your First Citizens Rewards card that was used for the purchases over $100. Some exclusions apply to certain categories of transactions. No statement credit will be applied, in whole or in part, against any monthly minimum payment due.

These terms are only a summary. Other restrictions and requirements apply. The full First Citizens Rewards® Program Rules will be provided upon enrollment and are accessible through the program website at FirstCitizensRewards.com at log in.

Program rules are subject to change or cancellation without notice.

Earning Reward Dollars

With Cash Back Rewards, you will earn 1 reward dollar for each $100 net dollars you spend for net retail purchases (gross retail purchases less any returns or credits). Earned reward dollars are calculated on actual dollars spent rounded up or down to the nearest point. Reward dollars will be deducted from the available rewards account balance for all returned purchases.

There is no monthly earnings cap. Reward dollars earned are available for redemption for 3 years. Reward dollars expiring during the year will be cleared from your Program Account on the last day of the month in which they expire.

Redeeming Reward Dollars

Each reward dollar is worth $1, which means that $100 reward dollars equals $100 in redemption value. Redemptions start as low as $25 rewards dollars.

You may redeem reward dollars back into other First Citizens banking products:

Cash Back to an existing First Citizens Bank checking account, savings account or credit card account
Account credits towards a First Citizens personal loan or mortgage

Cash back and account credit redemptions must be completed through the program website, however a statement credit back to your First Citizens Card can also be redeemed through the First Citizens Rewards Call Center. The redemptions will post within 2 to 8 business days. No First Citizens card or mortgage account credit will be applied, in whole or in part, against any monthly minimum payment due, however, account credits to your First Citizens consumer loan will be applied first to your outstanding interest and any remaining amount will be applied to your principal.

You may redeem rewards dollars for account credits to be deposited to your First Citizens checking or savings account or applied to your First Citizens credit card, consumer loan or mortgage.

You may use reward dollars for a Pay Me Back® redemption, meaning a statement credit for the corresponding dollar amount will be applied to your First Citizens Rewards card that was used for the purchases over $100. Some exclusions apply to certain categories of transactions. No statement credit will be applied, in whole or in part, against any monthly minimum payment due.

Program rules are subject to change or cancellation without notice.

Earning Points

At the Base Rewards Tier, you will earn 1 point for each $1 you spend for all net retail purchases (gross retail purchases less any returns or credits). Earned points are calculated on actual dollars spent rounded up or down to the nearest point. Points will be deducted from the available rewards account balance for all returned purchases.

At the Base Rewards Tier, cardholders may earn up to 10,000 points per calendar month. Points earned are available for redemption for a 3-year term. After the 3-year term, points expire and can no longer be redeemed. Points expiring during the year will be cleared from your Program Account on the last day of the month in which they expire.

Redeeming Points

Each point is worth $0.01, which means that 100 points equals $1 in redemption value. Redemptions start as low as 10,000 points. All rewards redemptions can be made through the First Citizens Rewards Center by telephone or through the program website. Some limitations apply.

You may redeem points back into other First Citizens banking products:

Cash Back to an existing First Citizens Bank checking account, savings account or credit card account
Account credits towards a First Citizens personal loan or mortgage

Redemptions are also available for retail gift cards and certificates, donations and merchandise.

These Terms are only a summary. Other restrictions and requirements apply. The full First Citizens Rewards® Program Rules will be provided upon enrollment and are accessible through the program website at FirstCitizensRewards.com at log in.

Program Rules are subject to change or cancellation without notice.

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Alternate Ways to Fund a Roth IRA

How it works

Here’s an example

Important considerations

A few financial insights for your life

Bonus Offer

Earning Points

Rewards Redemption

Bonus Offer

Earning Cash Back

Rewards Redemption

Bonus Offer

Earning Points

Rewards Redemption

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