A backdoor Roth IRA is a strategy used by high-income earners to contribute to a Roth IRA, which would otherwise be limited due to income restrictions. Here’s how it works in under a minute:

Step 1: Make a non-deductible contribution to a traditional IRA. Since there are no income restrictions on traditional IRA contributions, anyone can contribute to one.

Step 2: Convert the traditional IRA to a Roth IRA. This can be done by transferring the funds from the traditional IRA to a Roth IRA. Keep in mind that you may owe taxes on any earnings in the traditional IRA that have not yet been taxed.

Step 3: Enjoy the benefits of a Roth IRA. Once the funds are in the Roth IRA, they can grow tax-free, and withdrawals in retirement are also tax-free.

Overall, the backdoor Roth IRA strategy allows high-income earners to take advantage of the benefits of a Roth IRA, even if they would not be eligible to contribute directly due to income limits. It’s important to consult with a financial advisor or tax professional before utilizing this strategy to ensure it is done correctly and in compliance with IRS rules.

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