If you have the option through your employer-sponsored retirement plan to make non-deductible contributions to an IRA after you max out your 401(k) limits, you may be able to use a Backdoor Roth. In this episode of , CERTIFIED FINANCIAL PLANNER™ Professionals Tom Kennedy and Kevin M. Curley, II cover the specifics. Work with your CPA or financial advisor before you make these rollovers. We also discuss long-standing financial trends, the potential for a Eurozone downturn, and emerging markets debt.

Find it Fast:
Backdoor Roth Strategy
00:00—Intro
1:30—New contribution limits
2:50—After-tax backdoor rollover to Roth IRA for income-restricted investors
8:15—Step rule transaction

Headlines
12:50—Are long-standing financial trends like the 0% interest rates over?
15:00—Is the Eurozone headed for another downturn?
17:02—Emerging markets debt issuance hits a record
19:37—DeepMind using AI to reduce drug development times

Review and Outlook
21:55—Review bold prediction that S&P 500 nearly hit 5,000
22:10—How the market changes during an election year
27:01—Are we currently in a recession?

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Listen in to the Your Money Momentum podcast published twice monthly where you listen to your favorite pods or watch our latest video session on YouTube at Your Money Momentum.

Your Money Momentum podcast is produced by: Pamela Engstrom
Music by: PWISBY “Ruff”

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The Backdoor Roth IRA Strategy: A Clever Way to Save for Retirement

If you’ve ever found yourself earning too much to contribute to a Roth IRA, you may think that you’ve missed out on the tax benefits that come with this retirement savings account. However, there is a clever strategy known as the Backdoor Roth IRA that allows high-income earners to still take advantage of the benefits of a Roth IRA. In this article, we’ll take a closer look at this strategy and how you can use it to save for your retirement.

First, let’s review the basics of a Roth IRA. A Roth IRA is a retirement account that offers tax-free growth and tax-free withdrawals in retirement. Unlike traditional IRAs and 401(k) plans, contributions to a Roth IRA are made with after-tax dollars, meaning that you don’t get a tax deduction for your contributions. However, the trade-off is that you won’t owe any taxes on your withdrawals in retirement, including any investment gains you’ve accumulated over the years.

The problem for high-income earners is that there are income limits that restrict who can contribute to a Roth IRA. For 2021, the income limits for contributing to a Roth IRA are $140,000 for single filers and $208,000 for married couples filing jointly. If your income exceeds these limits, you are not eligible to contribute to a Roth IRA directly.

This is where the Backdoor Roth IRA strategy comes into play. The strategy involves making non-deductible contributions to a traditional IRA and then converting those funds into a Roth IRA. Since there are no income limits for making non-deductible contributions to a traditional IRA, this strategy allows high-income earners to effectively contribute to a Roth IRA by going through the “backdoor.”

Here’s how the Backdoor Roth IRA strategy works in practice:

1. Contribute to a Traditional IRA: First, you’d make a non-deductible contribution to a traditional IRA. For 2021, the contribution limit for IRAs is $6,000 ($7,000 if you’re age 50 or older). Remember, since you won’t be getting a tax deduction for this contribution, you’ll be using after-tax dollars to make the contribution.

2. Convert to a Roth IRA: Once the contribution has been made to the traditional IRA, you’ll then convert those funds into a Roth IRA. There are no income limits for converting a traditional IRA to a Roth IRA, so this step allows you to essentially “backdoor” your way into a Roth IRA.

It’s important to note that if you have any pre-tax money in traditional IRAs, such as from previous deductible contributions or rollovers from 401(k) plans, the Backdoor Roth IRA strategy may not be as advantageous due to the pro-rata rule. Consult with a financial advisor or tax professional to understand the implications of this rule on your specific situation.

In conclusion, the Backdoor Roth IRA strategy is a nifty way for high-income earners to still benefit from the tax advantages of a Roth IRA. By making non-deductible contributions to a traditional IRA and then converting those funds into a Roth IRA, you can effectively bypass the income limits for contributing to a Roth IRA directly. Remember to consult with a financial advisor or tax professional to ensure that this strategy is suitable for your financial situation. And as always, it’s important to stay informed about any changes in tax laws and regulations that may impact the Backdoor Roth IRA strategy.