Backdoor Roth IRAs – What is it and is it appropriate for you? Ask yourself, do you fall under the designated income limitations that prohibit you from contributing to a Roth IRA? Do you even know what those limitations are? To help answer some of those questions, watch the video. Sit down with a financial advisor to discuss the complex tax strategies. Reach out to us at 614-635-0102….(read more)

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A Backdoor Roth IRA is a smart investment tool for high-earning individuals who want to enjoy the benefits of a Roth IRA but cannot contribute directly to it. A Roth IRA is a tax-free retirement savings account that requires contributions after taxes, but the account’s earnings and withdrawals are tax-free.

However, there are income restrictions to who can contribute to a Roth IRA. For tax year 2021, the Roth IRA contribution limit is $6,000 ($7,000 for individuals over the age of 50) for individuals who earn less than $140,000 for singles or $208,000 for married couples filing jointly. These income limits make it tough for high-earning individuals to contribute to a Roth IRA.

Enter the Backdoor Roth IRA.

A Backdoor Roth IRA is a method for high-income earners to contribute directly to a Roth IRA. It involves opening a traditional IRA account, contributing to it, and then converting it into a Roth IRA. As a result, there are no income restrictions for contributions to a traditional IRA, which makes this method possible.

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

1. Open a traditional IRA account: In this account, you can make contributions that are not tax-deductible.

2. Make contributions to your traditional IRA account: You can make contributions up to $6,000 if you are under the age of 50, and $7,000 if you are over the age of 50. The contributions are not tax-deductible.

3. Convert your traditional IRA into a Roth IRA: Once the contributions are made, convert your traditional IRA to a Roth IRA. The conversion is tax-free if you have not earned any interest on your traditional IRA.

It is essential to note that you may owe taxes on a Backdoor Roth IRA conversion if you have earned interest on your traditional IRA account. If this is the case, consult with a financial advisor for assistance.

Another important thing to keep in mind is to avoid the pro-rata rule. The pro-rata rule can kick in if you have other traditional IRA accounts. If you do, the IRS will examine all of your traditional IRA contributions to determine the percentage that represents your contribution to the non-deductible traditional IRA account. This percentage is considered taxable income on your conversion to a Roth IRA.

In conclusion, a Backdoor Roth IRA is a fantastic investment tool for high-earning individuals who want to enjoy the benefits of a Roth IRA. To avoid mistakes, work with a financial advisor and keep an eye on the pro-rata rule when initiating your Backdoor Roth IRA conversion.