The Rich TAX LoopHole, the Backdoor Roth IRA!
Yes, this is a method used by the wealthy who cannot qualify for a regular Roth IRA.
This method allows you to save hundreds of thousands of dollars on taxes, and its relatively simple.
All you have to do is create both an IRA and a Roth IRA account, preferably at the same financial institution. then you fund your IRA, and transfer those funds to a Roth IRA. The key is that you make INDIRECT contributions to your Roth IRA, rather than DIRECT contributions! AWESOME!
BUT! there are some key notes you have to look out for.
In this video I cover what these accounts are and how you can take advantage of them in order to save on your tax obligations!
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CHAPTERS:
0:00 Introduction
0:20 Roth IRA
0:38 Traditional IRA
1:00 The benefits of Roth IRA & Examples
3:05 The PROBLEM with Roth IRA
3:33 Backdoor Roth IRA – the method
4:08 HOW to convert your funds from Traditional IRA to a Roth IRA
5:53 Potential downsides of doing backdoor Roth IRA
6:05 The PRO RATA Rule & examples
8:11 Conclusion on Backdoor Roth IRA
Note: ALWAYS Consult a TAX Professional / Financial Advisor!
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Taxes are one of the biggest expenses in our lives. Fortunately, there is a way to lower your taxes by using a backdoor Roth IRA. This is a powerful tool that can help you pay less in taxes, both now and in retirement. In this article, we’ll explain what a backdoor Roth IRA is, why it’s beneficial, and how to set one up.
What is a Backdoor Roth IRA?
A traditional Roth IRA is a type of retirement account where you contribute after-tax dollars. The benefits of a Roth IRA are that you don’t have to pay taxes on the earnings or withdrawals in retirement.
However, if you earn too much, you can’t contribute to a Roth IRA. In 2021, the income limit for single filers is $140,000, and for married filing jointly, it’s $208,000. This is where the backdoor Roth IRA comes in.
A backdoor Roth IRA is a loophole that allows high earners to contribute to a Roth IRA, even if they exceed the income limits. This is done by converting a traditional IRA into a Roth IRA, regardless of income.
The Best Time to Use a Backdoor Roth IRA
The best time to use a backdoor Roth IRA is when you expect to have a lower income in the future. For example, if you’re a high earner now, but plan on retiring in the next few years, your income will drop, and you’ll be in a lower income tax bracket. This makes it an ideal time to do the conversion to a Roth IRA.
Another ideal time is when you’re just starting your career and expect to earn more in the future. Since you won’t be able to contribute directly to a Roth IRA, you can start with a traditional IRA and convert it later when you’re earning more.
How to Set Up a Backdoor Roth IRA
Setting up a backdoor Roth IRA is a simple process. You’ll need to follow these steps:
1. Open a Traditional IRA: You can open a traditional IRA with any investment firm.
2. Make Contributions: You can make contributions to the traditional IRA, up to the annual limit of $6,000 per individual or $7,000 for those over age 50.
3. Convert to a Roth IRA: Once you’ve made contributions, you can convert the traditional IRA to a Roth IRA. The conversion will be treated as taxable income and you’ll need to pay taxes on the amount converted.
4. Pay Taxes: The taxes owed will depend on your income level and the amount converted. To avoid any penalties, make sure to pay taxes on the conversion before the deadline for filing your taxes.
In conclusion, a backdoor Roth IRA is a powerful tool that can help lower your taxes. By converting a traditional IRA to a Roth IRA, high earners can take advantage of the benefits of the Roth IRA, even if they exceed the income limits. It’s essential to consult with a financial advisor for guidance on your specific tax situation and make sure that a backdoor Roth IRA is right for you. With proper planning, a backdoor Roth IRA can be an effective strategy for reducing taxes and securing your retirement.
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This was my first time watching any of your videos and it was pretty informative and well-done, but man, that bye thing was weird. I would lose it if you want to be taken seriously.
Great video, I would love to see more regarding tax consequences, etc…
Great Video.. Can you convert 401k to Backdoor IRA?
What if you’re in the highest tax bracket right now already. Would it be better to do the traditional ira over the roth and then take the tax savings and put it into another long term account?
This is the best video on backdoor IRAs ive seen so far. Most other videos miss the rule you mention at 6:00. Its a huge deal. People really need to be wary of the rule mentioned at 6:00.
If your employer’s 401K has a Roth option, then you can do a Mega Backdoor Roth. You make after tax contributions and then have them immediately roll it over the funds into the Roth 401k. Fidelity supports this.
It's always nice to try the backdoor
How is a back door Ira helping me save money ?! Why can’t I just put my after tax dollars into Roth instead of putting it in traditional and then moving it ?
What is the max you can convert over to a ROTH IRA?
lol… posting exactly after the closing date of filing for taxes. FAILURE
I max out my Roth IRA every year now since 2021! Give feds less to tax!
You should have mentioned you can take your pretax 401k no matter how much moneys in it and do a rollover into a traditional IRA then backdoor it into a Roth IRA
The penalty before 5 years is staggering, and she obviously left that out. It's not just a penalty, it's draconian so think about that before you try it.
If I do the back door Roth IRA rollover, do I report the contribution as a Traditional IRA contribution on my tax software? If I report it as a Roth contribution, then the software flags me as being over my MAGI limits
WOuld love to explore your "backdoor"!
This video proved that all you have to do to be successfully on YT is to be good looking and have some kind of subject matter expertise. It helps to be female.
Are the yearly contribution limits for a Roth and a traditional in the same pool?
I have bought so many stocks in individual companies. There are so many stocks going to rocket in the long run, right now safe to invest in an ETF that tracks the S&P500 and ride it out. I put $130k into some growth stocks with a Financial advisor handling my portfolio. some of my picks are, NVR, LISP.SW, SEB, VOO,DOWJ, BRK-A, AAPL,IVV, NYSE, NASDAQ, TSLA, I've gotten 82% return so far this year I'll see where it goes.
I don't understand why the Roth IRA is constrained by income in the first place. It's already capped by the amount you can put in. The backdoor method is allowed by the IRS, so it's not like anyone who wants to is not already doing it. They are just making some people go through extra steps that benefit nobody.
If the company you work for has a 401k and you make 100k, you don’t qualify for a pre-tax traditional IRA. You can only contribute to a Roth IRA or after tax traditional IRA.
Thanks for the update and keep doing what you do. In my opinion, the recession has already happened last year. The Labor data is completely nonsensical due to pandemic lockdowns and people figuring out how to survive without working the same way they have historically. So much money on the sidelines matching up with the last year of pain will drive equity markets higher, People are starting to realize the value of their equity of choice is too good to pass up. For me, that is BTC and ETH. If they hold above the Bull Market support band, (currently is) over the next few weeks everyone's view will flip bullish.
A traditional IRA is tax deferred, so you only pay taxes once you withdraw funds from the account. Realized gains are NOT taxed until you take a distribution.
Does the Pro Rata rule apply to rollover IRAs from a previous employer's traditional 401k?
And yes please do videos on tax
Can this be done from a sep ira?
Need to mention how to avoid the pro rata rule by rolling any pre tax IRA into a 401k or other define benefit retirement plan making new back door Roth contributions
girl had me at backdoor