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Backdoor Roth IRAs are a great retirement planning option for high earners. Many people with high incomes are unable to contribute directly to Roth IRAs due to the income limits that the IRS imposes. However, people who have incomes that are above the limits can use a backdoor Roth conversion to make contributions to Roth IRAs.
There are many different ways to make a backdoor Roth conversion. In this video, I explain everything you need to know about backdoor Roth IRAs and backdoor Roth conversions. So, if you have been thinking about diversifying your retirement planning strategy, or if you simply want to understand what backdoor Roth IRAs are and how they work, this is the perfect video for you.
*Disclaimer: I am not a financial advisor nor am I an attorney. This information is for entertainment purposes only. It is highly recommended that you speak with a tax professional or tax attorney before performing any of the strategies mentioned in this video. Thank you.
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A backdoor Roth IRA conversion can be a valuable tool for high-income earners who want to take advantage of the benefits of a Roth IRA. By converting from a traditional IRA to a Roth IRA, individuals can enjoy tax-free growth and tax-free withdrawals in retirement. However, the process can be a bit complex and it’s important to follow the rules to avoid potential tax pitfalls. In this complete tutorial, we will walk you through the steps to make a backdoor Roth IRA conversion.
Step 1: Make sure you are eligible
Before you begin the backdoor Roth IRA conversion, it’s crucial to ensure that you meet the eligibility requirements. In general, anyone can make a nondeductible contribution to a traditional IRA regardless of their income level. However, the ability to convert those funds to a Roth IRA may be limited for high-income earners due to the income limits for contributing directly to a Roth IRA. If you are above the income limits for contributing directly to a Roth IRA, the backdoor Roth IRA conversion could be a suitable option for you.
Step 2: Contribute to a traditional IRA
If you are eligible for the backdoor Roth IRA conversion, the first step is to make a nondeductible contribution to a traditional IRA. You can contribute up to the annual limit set by the IRS, which is $6,000 for those under the age of 50 and $7,000 for those 50 or older. It’s important to note that you should not deduct this contribution on your tax return, as it would be considered an excess contribution.
Step 3: Convert to a Roth IRA
Once the funds are in your traditional IRA, you can initiate the conversion to a Roth IRA. This can be done by contacting your financial institution and requesting a direct transfer of the funds from your traditional IRA to your Roth IRA. It’s important to note that you will need to pay taxes on any pre-tax contributions and earnings in the traditional IRA when you make the conversion.
Step 4: Report the conversion on your taxes
When you make a backdoor Roth IRA conversion, it’s crucial that you report it properly on your taxes to avoid potential penalties. You will need to fill out IRS Form 8606 to report the nondeductible contribution to the traditional IRA and the subsequent conversion to a Roth IRA. This form helps keep track of the basis in your traditional IRA to avoid double taxation in the future.
Step 5: Consider the pro-rata rule
One potential stumbling block in the backdoor Roth IRA conversion process is the pro-rata rule. This rule comes into play if you have pre-tax funds in any of your traditional IRAs. When you convert funds to a Roth IRA, the IRS looks at the total balance of all of your traditional IRAs to determine the tax consequences of the conversion. If you have pre-tax funds in any of your traditional IRAs, the pro-rata rule could result in a larger tax bill when you make the conversion. To minimize the impact of the pro-rata rule, some high-income earners choose to roll their pre-tax IRA funds into their 401(k) if their employer plan allows it before initiating the backdoor Roth IRA conversion.
In conclusion, a backdoor Roth IRA conversion can be a valuable tool for high-income individuals who want to take advantage of the benefits of a Roth IRA. By following the steps outlined in this tutorial and being mindful of potential tax implications, you can successfully navigate the backdoor Roth IRA conversion process and set yourself up for tax-free growth and withdrawals in retirement. Be sure to consult with a financial advisor or tax professional if you have any questions or concerns about this strategy.
I’d be retiring/working much less in 5 years and curious to know best how people split their pay, how much of it goes into savings, spendings or investments. I earn around $250k per year, but nothing to show for it yet.
You say complete tutorial in the title but you don't give a single detail on the how except to contact your firm
Thanks for your information! Can you do a video on the BOI report at fincen.gov that companies have to file January 2024?
Im going to retire 2024 July @ 60. Is it smarter to contribute traditional 401k 30k for half of the year and only collect small pension the remaining to bring tax bracket down from 24% to hopefully 12% then convert what i can to Roth and pay the smaller tax?
Is this another way of calling it a Self Directed IRA?
This is a great video. Do you have any on Traditional IRAs?
Thank you so much for covering this information in a clear simplistic way. I am 62 and am in the process of planning my retirement. With pensions and social security etc, it can be confusing. Thanks for this great information!
The best explanation I've listened to about this subject
Financially Roth IRAs may not be worth it especially if you are in a very high tax bracket when you want to do the conversion. It actually might be cheaper to just do a traditional IRA and take that money out when you are in a lower bracket – you could pay a lot less tax. Roth IRAs benefit the government more than most Americans because they collect more tax money and they get it today.
I’m a High Income Earner and I have been using Back Door ROTH IRAs for over a decade
Do you have any tricks for LLC owners who have tons of student loans?
Is it AGI or gross income? As in, if I make $250k as married filing jointly, but $180k AGI, can I still make a Roth IRA contribution?
Thank you. You answered all my questions on this matter.
Good info Karlton, thank you. Can an Inherited IRA be converted to a Roth IRA through a
back-door conversion???
Also, when you make a conversion from a regular IRA to a Roth, do you pay taxes on the entire amount that is converted or just the gains that were realized in the regular IRA
Thank you
I love your tips Karlton.
This is interesting to learn about. Since I could see many people benefiting from this strategy.
The most ridiculous thing is that you put the money into the account, and you pay the early withdrawal penalty.
The reason I prefer to use my money in my investment brokerage account instead of IRA because I don’t want to be restricted.
You can use brokerage account by selling contracts or buying stocks to grown your money too though you pay capital gain tax.
Been trying to set this up made 175k this year
Karlton what is the income limit for Roth IRA * 220 or 228? Thanks
That first cut scene where they clashed pens made me cringe extra hard
Do you leave IRA account open after making roth conversions or you open new IRA account every year for funding Roth.
What if you contributed $6500 to IRA and before moving funds to Roth it has gained income with new balance of $6510. Do you leave earned income in IRA or move the total sum to Roth and report it as taxable income.
Great information as alway.
What about
If you started a Roth IRA when you below the income limit. But now currently are over the limit. Can I still put into my RoTh IRA?
The real KD happy holidays my brother