You can save over $4,000 per year with this simple strategy for high-income earners. In this video I explain how I personally use a back door Roth strategy to have my money grow tax-free and be 100% tax-free when I take it out in retirement. Each year my wife and I contribute to a traditional IRA and then immediately transfer it to a Roth IRA – that’s the backdoor Roth.

There are some caveats, so make sure to contact your accountant, CPA or financial advisor. The important thing to be aware of is that any tax-deferred money already in traditional IRA, SEP IRA or Simple IRA needs to be taken into account for taxes during a conversion.

Mike Morton is a fee-only advisor based in Harvard, MA. You can find out more at: …(read more)

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If you’re looking for a tax-advantaged way to save for retirement, a Backdoor Roth IRA might be the solution for you. This strategy allows high-income earners to contribute to a Roth IRA, even if their income exceeds the limits set by the IRS. Here’s how and why to use a Backdoor Roth IRA.

How it works:
The Backdoor Roth IRA is essentially a loophole in the tax code that allows individuals to convert a traditional IRA into a Roth IRA, regardless of their income level. Normally, high-income earners are prohibited from contributing to a Roth IRA because their income exceeds the annual limit set by the IRS. However, by using the Backdoor Roth strategy, individuals can make non-deductible contributions to a traditional IRA and then convert that to a Roth IRA.

To do this, you first make a non-deductible contribution to a traditional IRA. Since the contribution is non-deductible, you won’t receive a tax break in the year of the contribution. Then, you convert the traditional IRA to a Roth IRA. This conversion is not subject to income limits, so anyone can do it regardless of their income level. It’s important to note that if you have other traditional IRAs with pre-tax money, the conversion will be subject to taxes based on the proportion of pre-tax and after-tax funds in all your IRAs.

Why use a Backdoor Roth IRA:
There are several reasons why high-income earners may want to consider using a Backdoor Roth IRA. First and foremost, a Roth IRA offers tax-free growth and withdrawals in retirement. This means that your contributions and any investment gains will not be taxed when you withdraw them in retirement, providing a significant tax advantage over a traditional IRA or 401(k).

Additionally, a Roth IRA does not have required minimum distributions (RMDs) like a traditional IRA or 401(k). This means you can let your money continue to grow tax-free for as long as you live, and even pass it on to your heirs tax-free.

Furthermore, a Backdoor Roth IRA can be a valuable tool for tax diversification in retirement. By having both pre-tax and after-tax retirement savings, you can potentially minimize your tax burden in retirement by strategically managing withdrawals from different types of accounts.

In conclusion, the Backdoor Roth IRA is a valuable tool for high-income earners who want to take advantage of the tax benefits of a Roth IRA. By making non-deductible contributions to a traditional IRA and then converting it to a Roth, individuals can enjoy tax-free growth and withdrawals in retirement, as well as flexibility in managing their tax liability. If you’re considering this strategy, be sure to consult with a financial advisor or tax professional to ensure you understand the tax implications and to help you execute the conversion correctly.