How to Setup a Backdoor Roth IRA – Step by Step! 💰💰💰

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If you’re a high-income earner who doesn’t qualify for a traditional Roth IRA, setting up a backdoor Roth IRA may be an option for you. A backdoor Roth IRA allows you to contribute after-tax dollars to a traditional IRA and then convert it to a Roth IRA, which offers tax-free withdrawals in retirement. Here are the steps to set up a backdoor Roth IRA.

Step 1: Check Your Eligibility

Before opening a backdoor Roth IRA, ensure that you meet the eligibility criteria. If your modified adjusted gross income (MAGI) exceeds the limit set by the IRS, you won’t be able to contribute to a traditional Roth IRA. However, you can still make non-deductible contributions to a traditional IRA, which you can later convert to a Roth IRA.

Step 2: Open a Traditional IRA

If you don’t have a traditional IRA, you can open one with your broker or financial institution. Ensure that you choose a reputable firm that charges low fees.

Step 3: Make Your Non-Deductible Contribution

Once your traditional IRA is open, make your non-deductible contribution. As of 2021, you can contribute up to $6,000 to a traditional IRA if you’re under 50 years old or up to $7,000 if you’re over 50 years old.

Step 4: Convert to a Roth IRA

After you’ve made your non-deductible contribution to your traditional IRA, you’ll need to convert it to a Roth IRA. You can do this by contacting your broker or financial institution. You’ll need to complete a conversion form and indicate the amount you want to convert.

Step 5: Pay Taxes

Since you’ve already paid taxes on your non-deductible contribution, you won’t need to pay taxes on it again. However, you’ll need to pay taxes on any earnings in the account. Your financial institution should provide you with a 1099-R form, which you’ll need to include in your tax return.

Step 6: Report Your Backdoor Roth IRA on Your Tax Return

When reporting your backdoor Roth IRA on your tax return, you’ll need to indicate it as a conversion from a traditional IRA. You’ll also need to report any taxable earnings from the conversion.

Final Thoughts

Setting up a backdoor Roth IRA requires careful planning and attention to detail. It’s essential to consult with a tax professional or financial advisor to ensure that you’re following the IRS rules and avoiding any potential tax consequences. With the proper guidance, a backdoor Roth IRA can provide a valuable tax-free income stream in retirement.