The long-awaited back-door Roth IRA!

You’ve probably heard of people talking about this and wondered what sort of shady illegal nonsense they were doing.

It’s completely legal!

And as you can see, it’s not that hard to do.

You can elect not to withhold taxes because you didn’t invest the money when it was in the traditional IRA (if you followed these steps).

Make sure to file form 8606 in your 1040, but your brokerage will send you this form the following year so you don’t have to worry about it.

Max contribution: $6,000

“Spend less than you make, invest the difference in index funds, & avoid bad debt.” – Your FI Couple
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If you have been thinking about investing in a Roth IRA but make too much income to qualify for a traditional Roth, then a Backdoor Roth IRA may be for you. In this article, we’ll cover the basics of a Backdoor Roth IRA and show you how easy it is to set up.

What is a Backdoor Roth IRA?

A Backdoor Roth IRA is a retirement investment option for individuals who are not eligible to contribute to a traditional Roth IRA. This includes people who earn too much income to contribute directly to a Roth IRA but still want to enjoy the tax benefits of a Roth IRA.

The process involves contributing to a traditional IRA and then converting those funds to a Roth IRA sometime later. Since there are no income restrictions for converting a traditional IRA to a Roth IRA, this allows individuals to take advantage of the tax-free growth and withdrawals of a Roth IRA.

4 Easy Steps to Setting Up a Backdoor Roth IRA:

1. Contribute to a Traditional IRA

The first step in setting up a Backdoor Roth IRA is to contribute to a traditional IRA. This contribution is not tax-deductible, so it’s essential to ensure that you are eligible to contribute to this type of account. For the 2021 tax year, individuals can contribute up to $6,000 to their traditional IRA account, or $7,000 if you’re 50 or older.

2. Convert Your Traditional IRA to a Roth IRA

After contributing to your traditional IRA, you must wait for a period of time before converting it to a Roth IRA. Most financial experts recommend waiting at least 30 days before converting to avoid any complications or mistakes. Once the waiting period has passed, you can convert the funds from your traditional IRA to a Roth IRA.

3. Pay Taxes on the Conversion

Since money in a traditional IRA has never been taxed before, you will need to pay taxes on the conversion to a Roth IRA. The amount of taxes you owe will depend on your marginal tax rate and the amount of money you are converting. This can make or break the benefits of a Backdoor Roth IRA, so it’s important to talk to a financial professional or tax advisor before converting.

4. Enjoy Tax-Free Growth and Withdrawals

Once you have converted your traditional IRA to a Roth IRA, you can enjoy the tax-free growth and withdrawals that come with a Roth IRA. Any earnings or withdrawals from the account will not be subject to taxes, making it a smart choice for long-term investments.

In conclusion, a Backdoor Roth IRA is an excellent option for high-income earners who may not qualify for a traditional Roth IRA. While the process may seem complicated at first, it can be accomplished in just four easy steps. By contributing to a traditional IRA, converting to a Roth IRA, paying taxes on the conversion, and enjoying tax-free growth and withdrawals, you can take advantage of a powerful investment tool for your retirement planning.