When you want to save Roth money for retirement, but your income is too high… what do you do?

Do a Backdoor Roth IRA contribution!

Listen in where Jacob shares what a backdoor Roth contribution is, when you should do this (and when you SHOULDN’T), and how to do this correctly.

If you would like to your question answered here on the show, shoot me an email at jacob@retirementanswers.net.

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A Backdoor Roth IRA is a strategy used by high-income individuals to contribute to a Roth IRA, even if they are above the income limits set by the IRS. This strategy involves making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA.

Roth IRAs are a popular retirement savings vehicle because contributions are made with after-tax dollars, and qualified withdrawals are tax-free. However, there are income limits that restrict high-income individuals from contributing directly to a Roth IRA. For example, in 2021, the income limit for single filers is $140,000 and for married filers, it is $208,000.

The Backdoor Roth IRA strategy allows high-income individuals to get around these income limits. Here’s how it works:

Step 1: Make a non-deductible contribution to a traditional IRA
Since there are no income limits for contributing to a traditional IRA, high-income individuals can make a non-deductible contribution to a traditional IRA. In 2021, the contribution limit for an individual under the age of 50 is $6,000.

Step 2: Convert the traditional IRA to a Roth IRA
Once the non-deductible contribution has been made to the traditional IRA, the next step is to convert it to a Roth IRA. This can be done by transferring the funds from the traditional IRA to a Roth IRA. It’s important to note that when converting, any pre-tax funds in the traditional IRA will be subject to taxes.

It’s essential to understand that the Backdoor Roth IRA strategy may not be suitable for everyone. Individuals with significant pre-tax funds in their traditional IRAs may face tax implications when using this strategy. It’s important to consult with a financial advisor or tax professional to ensure that the Backdoor Roth IRA is the right strategy for your financial situation.

Additionally, the IRS has not explicitly endorsed or prohibited the Backdoor Roth IRA strategy, so there is some ambiguity surrounding its legitimacy. However, many financial professionals continue to recommend it as a viable strategy for high-income individuals to take advantage of the benefits of a Roth IRA.

In conclusion, the Backdoor Roth IRA is a strategy that allows high-income individuals to contribute to a Roth IRA, even if they are above the income limits set by the IRS. However, it’s important to weigh the potential tax implications and consult with a financial advisor or tax professional before using this strategy. As with any financial decision, it’s crucial to consider your individual circumstances and goals before implementing a Backdoor Roth IRA.