You may have heard the term “Backdoor Roth” before – but how does it work?

Roth IRAs have income restrictions. If you make over $146,000 (single) / $230,000 (married) in 2024, you can’t make a full Roth contribution.

However, to make a non-deductible (after-tax) contribution to a Traditional IRA, there are no such restrictions.

So, if you make too much to contribute to a Roth IRA directly, you can make a contribution to a Traditional IRA and then convert the balance to a Roth IRA.

Be mindful of the pro-rata rule which we’ll cover in another video. If you have any pre-tax money in a Traditional IRA (does not have to be the same IRA you use for your backdoor Roth), then the conversion step will be partially taxable.

*This content is educational and should not be taken as tax, legal or investment advice*…(read more)

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A Certified Financial Planner (CFP®) can be a valuable resource when it comes to understanding complex financial strategies, such as the Backdoor Roth IRA. This strategy allows high-income earners to contribute to a Roth IRA, even if their income exceeds the traditional limits for Roth contributions. Here’s how it works:

The Backdoor Roth IRA involves making a non-deductible contribution to a traditional IRA and then converting that contribution to a Roth IRA. This can be particularly advantageous for individuals who are ineligible to contribute directly to a Roth IRA due to their income exceeding the limits set by the IRS.

The traditional IRA contribution is made with after-tax dollars, meaning the contribution is not tax-deductible. However, when the funds are converted to a Roth IRA, they can grow and be withdrawn tax-free, assuming certain conditions are met.

It’s important to note that the Backdoor Roth IRA strategy is not without its complexities and potential pitfalls. For example, if an individual already has a traditional IRA with pre-tax dollars, the conversion to a Roth IRA could trigger a tax liability. Additionally, there are rules and guidelines to follow when executing the Backdoor Roth IRA, so it’s crucial to work with a knowledgeable financial advisor, such as a CFP®, to ensure the strategy is implemented correctly.

A CFP® can help clients navigate the rules and regulations surrounding the Backdoor Roth IRA, as well as determine if it is the right financial move for their specific situation. They can also provide guidance on how to optimize the strategy for maximum tax benefits and potential savings.

In conclusion, the Backdoor Roth IRA can be a powerful tool for high-income earners looking to take advantage of the tax benefits of a Roth IRA. However, due to its complexity and potential tax implications, it’s essential to work with a CFP® who can provide expert advice and guidance on how to execute the strategy effectively. By working with a CFP®, individuals can ensure they are making informed financial decisions that align with their long-term goals.