Have you heard of a Backdoor Roth IRA contribution? Well, do you make too much to make a normal Roth IRA contribution? That’s awesome! Here are the steps involved in making a Backdoor Roth IRA contribution for 2023:

Step 1: Check to see if you have Traditional IRA assets already. If you do, you might run into the Pro-Rata Rule, and you should reach out to your advisor (or FMF 😊) because there might be some options to avoid this.

Step 2: Make a non-deductible contribution to your Traditional IRA. Limits are $6,500 for 2023 or $7,500 if you’re over age 50.

Step 3: Do a Roth conversion to move money from your Traditional IRA to your Roth IRA.

As always, work with your financial advisor to implement any investment or tax strategy to make sure it fits into your overall game plan. You don’t want to create any unexpected or unnecessary tax issues.

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If you have been contributing to a traditional IRA, you may be overlooking one way to diversify your retirement savings that limits your tax liability. A Backdoor Roth IRA contribution is a strategy that allows you to move money from a traditional IRA into a Roth IRA, offering you tax benefits down the line. Here’s a step-by-step guide on how to execute this strategy in 2023.

1. Make sure you’re eligible to contribute to a Roth IRA

The Roth IRA has income limitations, so you’ll want to make certain that you’re eligible. If your adjusted gross income (AGI) is above a certain threshold, you won’t qualify. For example, if your filing status is single, your AGI must be under $140,000 for the 2022 tax year, and under $144,000 for 2023. If you’re married filing jointly, the limits are $208,000 for 2022 and $214,000 for 2023. Additionally, if you already have a Roth IRA, make sure you’re not over the contribution limit of $6,000 in 2022 and $6,000 in 2023 (or $7,000 if you’re over age 50).

2. Open a traditional IRA

If you don’t already have one, you’ll need to open up a traditional IRA. You can do this through a brokerage firm, financial advisor, or a bank. You don’t have to contribute anything to the traditional IRA if you don’t want to, but it’s required for the backdoor Roth contribution.

3. Make a traditional IRA contribution

For 2023, investors can contribute up to $6,000 to traditional IRAs ($7,000 if you’re over 50). Make the maximum contribution, or as much as you can afford. Keep in mind, you won’t receive a tax deduction for the traditional IRA contribution. Instead, you’ll get a deduction for the Roth conversion later on.

4. Do the Roth conversion

After you’ve made your traditional IRA contribution, go ahead and convert it to a Roth IRA. This can be done either through the brokerage or financial advisor that you used to open the traditional IRA, or you can transfer it to another Roth IRA account. Make sure you complete the conversion before December 31st of the tax year, so they will be accounted for when you do your taxes.

5. Pay taxes on the conversion

The portion of the traditional IRA account that’s converted to a Roth IRA is taxable. Since you didn’t deduct the traditional IRA contribution, the tax bill will be based on any investment earnings and gains. The taxable earnings are reported on your tax return in the same year as the conversion.

6. Reap the benefits

Once the funds are in your Roth IRA account, they will grow tax-free. This means that you won’t have to pay taxes on any gains or distributions. Additionally, you won’t be required to make minimum distributions from the account until you’ve reached age 72.

Overall, the backdoor Roth IRA contribution offers investors a way to diversify their retirement savings while minimizing tax liability. It’s important to make sure you’re eligible and follow each step carefully to ensure that you receive the tax benefits. By following these steps, you can take advantage of a Roth IRA’s tax-free growth and save more for your retirement in the long run.