Ever wonder what a Backdoor Roth IRA is and how to set a Backdoor Roth IRA up?

Well this is the video for you!

Honestly a Backdoor Roth IRA in my opinion just sounds sketchy, but in reality, it’s not at all and it’s completely legal!

But before I go into what a Backdoor Roth IRA is and how to set it up you have to understand what a Traditional IRA and a Roth IRA are.

Basically, an IRA retirement account is a bucket that you put your stocks into and each bucket determines how you will be taxed on that money.

Roughly a Traditional IRA is an account where you can put your money in and it gets taxed at the end and there is not income limit in order for you to put your $6k in each year.

A Roth IRA is an account where you get taxed on your money and then put it into your Roth IRA account. When you take the money out it doesn’t get taxed. However, there are income limits in order to put money in. If you make over $198k per year and are married filing jointly you can’t put the $6k into your Roth IRA account.

This is where the Backdoor Roth IRA comes into play. Basically, you can set up a Traditional IRA account transfer your money from that account into a Roth IRA account and BOOM you have a Backdoor Roth IRA….(read more)

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A Roth Individual retirement account (IRA) is a popular retirement savings option that allows one to make contributions with after-tax dollars and enjoy tax-free withdrawals in retirement. However, there are annual income limits for eligibility to contribute to a Roth IRA. In 2021, those limits are $140,000 for individual filers and $208,000 for married couples filing jointly.

But what if you are over the income limit? That’s where a backdoor Roth IRA comes in.

A backdoor Roth IRA is a way for high-income earners to contribute to a Roth IRA regardless of the income limits. This strategy involves making a nondeductible contribution to a Traditional IRA and then converting that account to a Roth IRA. Since the contribution is after-tax, there is no tax liability on the conversion.

Setting up a Backdoor Roth IRA

Here are the steps to set up a backdoor Roth IRA:

Step 1: Check if you are eligible for a Traditional IRA contribution: There are no income limits for contributing to a Traditional IRA, but there are age limits. If you are younger than age 70½, you can contribute up to $6,000 per year for 2021 ($7,000 if you are 50 or older).

Step 2: Make your Traditional IRA contribution: Once you’ve confirmed your eligibility, make your contribution to a Traditional IRA. Be sure to designate it as a nondeductible contribution on your tax return.

Step 3: Convert your Traditional IRA to a Roth IRA: Once your contribution has been made, convert the amount to a Roth IRA. You can do this by contacting your IRA provider and requesting the conversion. There are no tax consequences to this conversion if you have made a nondeductible contribution.

Step 4: Manage reporting: Report the contribution and conversion on your tax return using IRS Form 8606. This form helps you track your nondeductible contributions to your Traditional IRA and ensures that you do not pay taxes on the conversion.

Things to Keep in Mind

1. Backdoor Roth IRA can have tax consequences if you already have a pre-tax IRA account.

2. The IRS has clear rules on the timing of the conversion, so make sure to follow them carefully.

3. Backdoor Roth IRA conversions can be done at any time during the year, but it’s usually best to do it early in the year to maximize the tax benefits.

Final Thoughts

A backdoor Roth IRA can be a useful tool for high-income earners who want to contribute to a Roth IRA but cannot due to income limits. It involves making a nondeductible contribution to a Traditional IRA and then converting it to a Roth IRA. The process is simple, but it’s important to follow the rules carefully to avoid tax consequences. Before you set up a backdoor Roth IRA, it’s a good idea to consult a financial advisor or tax professional to ensure it’s the right strategy for your retirement goals.