As a small business owner, maxing out contributions to your affordable 401k plan may not feel like enough retirement savings. You want to stash away as much as possible in tax-advantaged accounts.

A great option to supplement your 401k is using a Backdoor Roth IRA. Here’s how it works:

Contribute to a traditional IRA (non-deductible)

Convert the traditional IRA to a Roth IRA

Unlike the 401k, there’s no upfront tax deduction for contributions. But once in the Roth, your money grows 100% tax-free. Qualified withdrawals in retirement are also tax-free.

The Backdoor Roth IRA allows you to shelter an extra several thousand dollars annually. Combined with the 401k, it provides small business owners serious tax-free compound growth on retirement savings.

#BackdoorRoth #RothIRA #401kandRoth #retirementsavings #taxadvantaged #smallbizretirement #additionalcontributions #taxplanning #compoundsinterest #retirementeasy

#blackcpa #africanamericancpa #businessmanager #virtualcfo #taxbrackets #blackbusinessmanager #fractionalcfo #cpa #africanamericancpa #africanamericancfo #africanamericanaccountant #blackaccountant #blackaccountingfirm

About Me:

Christopher J. Campbell, CPA www.chriscampbellcpa.com info@chriscampbellcpa.com

I operate a virtual accounting firm focusing on tax, accounting, bookkeeping and CFO services for closely held businesses and individuals. I additionally provide business management services for creatives….(read more)

LEARN MORE ABOUT: IRA Accounts

CONVERT IRA TO GOLD: Gold IRA Account

CONVERT IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA

A Backdoor Roth IRA is a financial strategy that allows high-income earners to contribute to a Roth IRA, even if they are above the income limits set by the IRS. The Backdoor Roth IRA is a legal and legitimate way for individuals to take advantage of the benefits of a Roth IRA, which include tax-free withdrawals in retirement.

The Roth IRA is a retirement account that allows individuals to contribute after-tax income, and the money can grow tax-free. When withdrawals are made in retirement, they are also tax-free. However, the IRS sets income limits for contributing to a Roth IRA. In 2021, the income limit for single filers is $140,000 and for married couples filing jointly, it is $208,000. If an individual’s income surpasses these limits, they are not eligible to contribute to a Roth IRA directly.

This is where the Backdoor Roth IRA comes in. In order to utilize this strategy, individuals contribute to a traditional IRA, which has no income limits. They then convert the traditional IRA to a Roth IRA. The process of contributing to a traditional IRA and then converting it to a Roth IRA is often referred to as a “backdoor” because it allows high-income earners to circumvent the income limits set by the IRS.

It’s important to note that the Backdoor Roth IRA strategy is only beneficial if the individual does not currently have a traditional IRA with pre-tax contributions. If pre-tax funds exist in a traditional IRA, the conversion to a Roth IRA will be subject to taxes. However, if the traditional IRA was funded with after-tax contributions, the conversion will not incur tax liability.

There are a few key points to consider when using the Backdoor Roth IRA strategy:

1. Taxes: When converting a traditional IRA to a Roth IRA, any pre-tax contributions will be subject to income tax. It’s important to consult a tax professional to fully understand the tax implications of a conversion.

2. Pro Rata Rule: The IRS applies the pro rata rule to calculate the tax liability for a conversion if the individual has both pre-tax and after-tax contributions in their traditional IRA. This can make the process more complex and may result in higher taxes.

3. Contribution Limits: The annual contribution limit for IRAs in 2021 is $6,000, or $7,000 for individuals aged 50 and over. This limit applies to the total contributions made to both traditional and Roth IRAs.

The Backdoor Roth IRA can be a valuable strategy for high-income earners who want to take advantage of the tax benefits of a Roth IRA. However, it’s important to carefully consider the tax implications and consult with a financial advisor or tax professional before utilizing this strategy. As with any financial decision, it’s important to fully understand the rules and regulations to ensure compliance with IRS guidelines.