Step-by-step instructions on how to do a Roth IRA Conversion, aka the Backdoor Roth IRA….(read more)

LEARN MORE ABOUT: IRA Accounts

CONVERT IRA TO GOLD: Gold IRA Account

CONVERT IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA

Backdoor Roth IRA: How It Works and Why It’s Beneficial

A Roth IRA is a tax-advantaged retirement account that allows individuals to contribute after-tax dollars and withdraw earnings tax-free in retirement. However, for high-income earners who exceed the income limits for Roth IRA eligibility, the Backdoor Roth IRA can be a solution.

What is a Backdoor Roth IRA?

A Backdoor Roth IRA is not an actual type of IRA, but rather a strategy used to contribute to a Roth IRA indirectly. It involves making a nondeductible contribution to a traditional IRA and then converting those funds to a Roth IRA.

How does it work?

The Backdoor Roth IRA process involves three steps:

Step 1: Make a nondeductible contribution to a traditional IRA account.

There are no income limits on contributing to a traditional IRA. However, if you or your spouse is covered by a workplace retirement plan, the amount you can contribute is limited based on your modified adjusted gross income (MAGI).

Step 2: Wait for the contribution to be settled and converted.

You must wait for the contribution to settle before converting it to a Roth IRA. This can take a few days or weeks. The conversion can be done online or by contacting your brokerage firm.

Step 3: Pay taxes on any gains.

If the contribution was made using after-tax funds, you won’t owe taxes on the amount you contributed. However, any gains will be taxed as income in the year of the conversion. If you have other money in traditional IRA accounts, you must convert them all to a Roth IRA to avoid the pro-rata rule.

Why is it beneficial?

Using the Backdoor Roth IRA strategy can be beneficial for high-income earners who want to contribute to a Roth IRA but are ineligible due to income limits. It allows them to take advantage of tax-free withdrawals in retirement.

Additionally, a Roth IRA has no required minimum distributions (RMDs) at age 72, unlike traditional IRAs. This means that individuals can leave the account untouched and continue to grow tax-free earnings for their beneficiaries.

Conclusion

The Backdoor Roth IRA strategy is a legal way for high-income earners to contribute to a Roth IRA. While it involves a bit more paperwork and planning, it can be a worthwhile option for individuals who desire tax-free withdrawals in retirement. It’s always best to consult with a financial advisor or tax professional before making any complicated financial decisions.