Colin discusses the Back Door Roth IRA strategy and demonstrates how to use it to add tens and even hundreds of thousands of dollars to your retirement account in the long run….(read more)

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When it comes to saving for retirement, there are many different options available. One option that is gaining in popularity is the Backdoor Roth IRA. This type of IRA can be a great choice for those who earn too much to contribute to a traditional Roth IRA, but still want to take advantage of the tax benefits that come with a Roth IRA. In this article, we’ll explain what a Backdoor Roth IRA is and how it works.

What is a Backdoor Roth IRA?

A Backdoor Roth IRA is a way for high earners to get around the income limits that prevent them from contributing directly to a Roth IRA. In 2021, the income limit for Roth IRA contributions is $140,000 for individuals and $208,000 for married couples filing jointly. If you earn more than that, you are not able to contribute to a Roth IRA directly.

However, there is a way to get around this income limit by using a Backdoor Roth IRA. Essentially, this involves making non-deductible contributions to a traditional IRA and then converting those funds to a Roth IRA.

How does a Backdoor Roth IRA work?

The first step in setting up a Backdoor Roth IRA is to open a traditional IRA. Since you can’t contribute directly to a Roth IRA, the traditional IRA serves as a “backdoor” for making the contributions that will eventually end up in a Roth IRA.

Once you’ve opened a traditional IRA, you can make non-deductible contributions to it. In 2021, the maximum contribution to a traditional IRA is $6,000 for those under age 50 and $7,000 for those 50 or older.

After making your non-deductible contributions, you will need to convert the funds to a Roth IRA. The conversion process is relatively straightforward and can typically be done online through your IRA provider.

It’s important to note that because the contributions were non-deductible, there will be no tax consequences when you convert the funds to a Roth IRA. This is because you’ve already paid taxes on the money you contributed to the traditional IRA.

What are the benefits of a Backdoor Roth IRA?

One of the main benefits of a Backdoor Roth IRA is that it allows high earners to take advantage of the tax benefits of a Roth IRA. Roth IRAs offer tax-free growth and tax-free withdrawals in retirement, making them a great option for those who want to minimize their tax bill in retirement.

Another advantage of a Backdoor Roth IRA is that there are no income limits on Roth IRA conversions. This means that even if you earn too much to contribute directly to a Roth IRA, you can still convert funds from a traditional IRA to a Roth IRA.

Conclusion

A Backdoor Roth IRA can be a great option for high 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 those funds to a Roth IRA, you can get around the income limits that prevent you from contributing directly to a Roth IRA. As always, it’s important to consult with a financial advisor to determine if this strategy is right for you.