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LEARN MORE ABOUT: IRA Accounts

INVESTING IN A GOLD IRA: Gold IRA Account

INVESTING IN A SILVER IRA: Silver IRA Account

REVEALED: Best Gold Backed IRA

A Backdoor Roth IRA is a method used by high-earners to contribute to a Roth IRA even if they exceed the income limits set by the IRS. It’s a perfectly legal way to take advantage of the tax benefits of a Roth IRA, and it can be a valuable financial strategy for many individuals.

Here’s a step-by-step guide to the Backdoor Roth IRA process:

Step 1: Make sure you qualify
Before you consider a Backdoor Roth IRA, make sure you qualify under the IRS rules. For 2021, if you’re single, you can contribute to a Roth IRA if your modified adjusted gross income (MAGI) is less than $140,000. For married couples filing jointly, the limit is $208,000. If your income exceeds these limits, you may be a candidate for the Backdoor Roth IRA.

Step 2: Open a traditional IRA
If you don’t already have a traditional IRA, you’ll need to open one with a financial institution of your choice. Keep in mind that you’re not actually contributing to this account for the long-term growth of your retirement funds—it’s just a temporary stop on the road to getting those funds into a Roth IRA.

Step 3: Make a non-deductible contribution to your traditional IRA
Once your traditional IRA is set up, make a non-deductible contribution to it. For 2021, the maximum annual contribution limit to an IRA is $6,000, or $7,000 if you’re age 50 or older.

Step 4: Convert the traditional IRA to a Roth IRA
After you’ve made the non-deductible contribution to your traditional IRA, you’ll need to convert it to a Roth IRA. You can do this by filling out a conversion form with your financial institution and transferring the funds from your traditional IRA into your Roth IRA account.

Step 5: Pay attention to taxes
Since the money in your traditional IRA has already been taxed, you shouldn’t owe any taxes on the conversion. However, if you have any other pre-tax traditional IRA funds, the conversion will be subject to the pro-rata rule, which can result in some taxable income. It’s best to consult with a tax professional to ensure you’re handling the tax implications correctly.

Step 6: Consider the timing
When considering a Backdoor Roth IRA, it’s important to pay attention to the timing of the conversion. It’s generally recommended to convert the funds to your Roth IRA as soon as possible after making the non-deductible contribution to your traditional IRA. This will minimize the potential for any investment earnings to accrue in the traditional IRA, which could create additional tax issues when you convert to a Roth IRA.

The Backdoor Roth IRA is a valuable tool for high-income earners who want to take advantage of the benefits of a Roth IRA. By following these steps and consulting with a financial advisor or tax professional, you can take advantage of this strategy and secure a more comfortable retirement for yourself.