How can you fund a Roth IRA if you make too much money? With a Backdoor Roth Conversion you can move retirement funds into a Roth IRA regardless of your level of income. One of the most frustrating parts about Roth IRA’s is that if you make too much money you can’t contribute to a Roth. If you go in the front door with a typical Roth contribution.

However, if you go in the back door via a Backdoor Roth Conversion you can still fund a Roth IRA regardless of income. I explain the process, as well as why it’s still worth the extra steps needed to go in the back door to fund your retirement.

0:00 Intro
0:45 What is a Backdoor Roth Conversion?
1:25 Roth Conversion Vs. Backdoor Roth Conversion
2:51 Why Do a Backdoor Roth Conversion?
3:58 The Second Reason To Do it

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How To Fund A Roth When You Make Too Much: The Backdoor Roth Conversion

When it comes to saving for retirement, there are few options as appealing as a Roth Individual retirement account (IRA). With tax-free growth and tax-free withdrawals in retirement, the Roth IRA is an excellent vehicle for building wealth. However, not everyone is eligible to contribute to a Roth IRA due to income limitations imposed by the IRS. Fortunately, there is a solution – the Backdoor Roth Conversion.

What is a Backdoor Roth Conversion?
A Backdoor Roth Conversion is a method of contributing to a Roth IRA when your income exceeds the limits set by the IRS. The process involves making a non-deductible contribution to a Traditional IRA and then immediately converting that Traditional IRA into a Roth IRA. Since there are no income limits for making non-deductible contributions to a Traditional IRA, this workaround allows high-income earners to fund a Roth IRA indirectly.

Steps to Perform a Backdoor Roth Conversion:
1. Check your eligibility: Before beginning the conversion process, make sure you are ineligible to contribute directly to a Roth IRA based on your income. For 2021, individuals with Modified Adjusted Gross Income (MAGI) above $140,000 (or $208,000 for married couples filing jointly) are not eligible to contribute directly to a Roth IRA.

2. Open a Traditional IRA: If you currently do not have a Traditional IRA, you will need to open one with a financial institution of your choice. It is essential to ensure that the account you open allows for both non-deductible contributions and conversions to a Roth IRA.

3. Make a non-deductible contribution: Contribute funds to your newly opened Traditional IRA while designating it as a non-deductible contribution. For 2021, the maximum contribution limit is $6,000 ($7,000 if you are aged 50 or older).

4. Convert funds to a Roth IRA: Once your non-deductible contribution has been made, you can convert the funds into a Roth IRA. The conversion is a straightforward process that involves filling out the necessary paperwork with your financial institution.

5. Pay attention to taxes: Depending on your particular financial situation, the conversion from a Traditional IRA to a Roth IRA may have tax implications. If you have any pre-tax funds in any Traditional IRA accounts, a portion of the conversion may be subject to taxes. Consult with a tax professional to understand the tax consequences of your Backdoor Roth Conversion.

6. Repeat annually: The Backdoor Roth Conversion is an annual strategy, as you are not limited in the number of conversions you can make each year. However, it is essential to note that any pre-tax funds in your Traditional IRA accounts will complicate the tax consequences of the conversion.

Benefits of a Backdoor Roth Conversion:
1. Tax-free growth: The primary advantage of a Roth IRA is tax-free growth. By contributing using the Backdoor Roth Conversion method, you can enjoy the growth of your investments without worrying about taxes eating into your returns.

2. Tax-free withdrawals in retirement: Unlike Traditional IRAs, which are subject to ordinary income tax upon withdrawal, Roth IRAs allow for tax-free withdrawals in retirement. By using the Backdoor Roth Conversion, you can ensure your retirement savings are protected from future tax increases.

3. Estate planning benefits: Roth IRAs offer unique estate planning benefits. Since withdrawals during retirement are tax-free, any remaining funds can be passed on to your heirs tax-free as well, providing a significant advantage over Traditional IRAs.

Considerations and Limitations:
While the Backdoor Roth Conversion offers an excellent opportunity to fund a Roth IRA despite income limitations, several considerations and limitations must be acknowledged:
1. Existing Traditional IRA funds: If you have pre-tax funds in any Traditional IRA accounts, the IRS’s pro-rata rule applies. This rule requires you to consider all Traditional IRAs when calculating the taxable portion of the conversion.

2. Taxes on conversions: Depending on your financial situation, you may need to pay income taxes on the converted amount. It is crucial to consult with a tax professional to understand the potential tax consequences.

3. Future legislative changes: Although the Backdoor Roth Conversion is a legitimate strategy currently permitted by the IRS, it is subject to potential legislative changes. With changing tax laws, it is essential to stay updated on any modifications that may affect this strategy.

In conclusion, the Backdoor Roth Conversion provides a valuable opportunity for high-income earners to fund a Roth IRA. By making non-deductible contributions to a Traditional IRA and converting those funds into a Roth IRA, individuals can take advantage of the tax-free growth and tax-free withdrawals offered by Roth IRAs. However, it is important to understand the process, tax implications, and any potential legislative changes before implementing this strategy. Consult with a financial advisor or tax professional to ensure this approach aligns with your overall financial planning and retirement goals.