“Hi Joe, Al and the Great and Powerful Andi! Regarding Podcast 391 at 23:54, 32-year-old Mike said he made his Roth $6000 “contribution” through a back door “conversion”. Maybe I am off-base here, but I wonder if there is some confusion related to the conversion and contribution terms. His income for a “contribution” was too high for a direct Roth contribution. However; if he is converting to a ROTH IRA, that’s a different story and he should NOT mark it on his taxes as a “contribution” because it is a conversion. The $6000 limit is also for a contribution but not a conversion. For Mike’s sake, in case there is confusion on the terminology, can you explain the differences between ROTH contributions and their limits (income/contribution) compared to a ROTH conversion with limits (income/conversion NOT “contribution”)? Thanks, Nancy”

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REVEALED: Best Gold Backed IRA

The Backdoor Roth IRA is a popular investment option for high-income earners who are not eligible for regular Roth IRA contributions due to income limits. In this article, we’ll discuss Backdoor Roth contributions, conversions, income limits, and how they work.

Firstly, it’s important to understand what a Roth IRA is. A Roth IRA is a type of individual retirement account that allows individuals to make after-tax contributions and grow their money tax-free. Withdrawals from a Roth IRA are also tax-free as long as the account has been open for at least five years and the account owner is over 59 ½ years old.

However, there is an income limit for Roth IRA contributions. For 2021, the income limit for single filers is $140,000 and for married couples filing jointly, it’s $208,000. If you earn more than these limits, you’re not eligible to contribute to a Roth IRA.

This is where the Backdoor Roth IRA comes in. An individual can take advantage of the Backdoor Roth IRA by making a non-deductible contribution to a traditional IRA, and then converting that contribution to a Roth IRA. The conversion allows the individual to effectively make a Roth IRA contribution despite the income limitations.

For example, let’s say John earns $250,000 a year and is not eligible to contribute to a Roth IRA due to the income limit. John could make a non-deductible contribution of $6,000 to a traditional IRA and then convert that contribution to a Roth IRA. The contribution is non-deductible because John’s income is above the limit, but the conversion is still allowed.

It’s important to note that there are some tax implications to consider before making a Backdoor Roth IRA contribution. If you have any pre-tax contributions in your traditional IRA, it can complicate the process and potentially trigger taxes. Additionally, if you earn a high income, you may owe taxes on the conversion.

To avoid any potential tax complications, it’s important to work with a financial advisor who can help guide you through the process.

In conclusion, the Backdoor Roth IRA is a useful tool for high-income earners who want to take advantage of the benefits of a Roth IRA. By making a non-deductible contribution to a traditional IRA and then converting that contribution to a Roth IRA, individuals can effectively make a Roth IRA contribution despite the income limitations. However, before making any contributions or conversions, it’s important to consider potential tax implications and work with a financial advisor.