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Backdoor Roth IRA and Retirement Options Before Year-End – In this episode Mike Jesowshek, CPA talks about setting up a Solo 401k before year-end as well as the backdoor Roth IRA strategy for high income earners.
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Podcast Host: Mike Jesowshek, CPA – Founder of JETRO (www.JETROtax.com)
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Podcast Website: www.TaxSavingsPodcast.com
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As the year comes to a close, it’s time to start thinking about your retirement options and making some smart financial moves. One option you might want to consider is a Backdoor Roth IRA. Let’s dive into what a Backdoor Roth IRA is and why it could be a beneficial retirement strategy for you.

What is a Backdoor Roth IRA?

A Backdoor Roth IRA is a conversion strategy that allows high-income earners to contribute to a Roth IRA, even if their income level exceeds the limits set by the Internal Revenue Service (IRS). Typically, there are income restrictions for contributing directly to a Roth IRA, but by utilizing the backdoor method, individuals can still take advantage of the tax-free withdrawals that the Roth IRA offers.

How does it work?

The Backdoor Roth IRA involves two steps: a non-deductible Traditional IRA contribution and a subsequent Roth IRA conversion.

First, you make a non-deductible contribution to a Traditional IRA. Since there are no income restrictions for contributing to a Traditional IRA, this step is accessible to everyone, regardless of income level. It is important to note that the contribution to the Traditional IRA should not be tax-deductible. You should consult with a tax professional for assistance in correctly making the contribution.

Next, you convert the Traditional IRA account into a Roth IRA. The conversion is a taxable event, meaning you have to pay income taxes on the amount converted. However, if you have made a non-deductible contribution to the Traditional IRA, only the growth on that contribution will be subject to taxes.

Why consider a Backdoor Roth IRA?

One of the primary advantages of a Roth IRA is the ability to withdraw funds tax-free in retirement. By utilizing the backdoor method, you can potentially accrue significant tax savings in the long run. Additionally, there are no required minimum distributions (RMDs) for Roth IRAs during the account owner’s lifetime, offering more flexibility in managing your retirement savings.

Retirement options before year-end

While the Backdoor Roth IRA is a great option for high-income earners, it’s not the only strategy you should consider before the end of the year. Here are a few additional retirement options worth exploring:

1. Maximize contributions to your workplace retirement plan: If you have access to a 401(k) or similar employer-sponsored plan, it is essential to contribute the maximum allowed amount. Contributions to these plans are tax-deductible, helping to reduce your taxable income.

2. Consider a Health Savings Account (HSA): If you have a high-deductible health plan, you may qualify for an HSA. Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. An HSA can be an excellent way to save for healthcare expenses in retirement.

3. Contribute to an Individual retirement account (IRA): In addition to the Backdoor Roth IRA strategy, you can make contributions to a Traditional IRA or a Roth IRA directly if you fall within the income limits. Contributions to a Traditional IRA may be tax-deductible, depending on your income and whether you have access to an employer-sponsored plan.

Conclusion

As the year approaches its end, taking advantage of retirement options is crucial for your financial future. The Backdoor Roth IRA strategy can offer tax advantages to high-income earners who would otherwise be ineligible for a direct Roth IRA contribution. Alongside this strategy, maximizing contributions to workplace retirement plans, considering an HSA, and contributing directly to an IRA are other retirement options worth exploring. Take the time to evaluate your financial situation, consult with a financial advisor, and make the best choices to secure a comfortable retirement.