How a Backroor Roth works! 🤯#personalfinance
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As people start earning more money through their career, they tend to save for their future. But there is always a question on how much one should save for their retirement. The answer varies depending on the person’s financial and life goals. However, to be financially secure, someone must save as much as possible. A Roth IRA is an excellent investment tool to help you save for your future. But, what if you make too much to contribute?
Luckily, there is a solution. It’s called a backdoor Roth IRA. Here’s how it works:
Step 1: Contribute to a Traditional IRA
Start by contributing the maximum contribution amount to a traditional IRA account; [$6,000 in 2021, plus an additional $1,000 catch-up contribution for individuals over the age of 50].
Step 2: Convert the Traditional IRA to a Roth IRA
Immediately following this, seek the guidance of a financial advisor or your IRA custodial institution to convert the traditional IRA to Roth IRA. Due to the Backdoor Roth, you will not be able to extract the full tax benefits, but by converting from a traditional IRA to a Roth IRA, you will still receive a tax benefit in the long run because Roth contributions grow tax-free.
Note: If you don’t have any traditional IRAs already done, recharacterize the contribution from a Traditional IRA to a Roth IRA.
Step 3: Pay taxes on Any Taxable Amount
The converted assets must be reported as income and, if you have a taxable income, you must pay income taxes on the amount that exceeds your initial contributions. This will help you cover the income taxes on the money that you converted from a traditional IRA to a Roth IRA.
In summary, the backdoor Roth IRA involves putting money into a traditional IRA and switching that money over to a Roth IRA, whereby you can grow your investment account tax-free. This technique is mostly used by people with high incomes who are ineligible to make direct contributions to a Roth IRA account. However, the backdoor Roth IRA may be subject to specific rules, so it’s always essential to check with a financial advisor to be sure it’s the right approach for you.
Overall, a backdoor Roth IRA is an investment strategy that can provide numerous benefits for those who make higher incomes. It’s an option that provides an additional avenue for retirement savings, and can be an excellent supplement to other retirement accounts. By using a backdoor Roth IRA, it’s possible to achieve greater financial security and peace of mind, as you’ll be able to better ensure a solid source of income in your retirement years.
U still have to pay tax on it to have it later what's the fkn point taxes will likely be higher in 20nyears
Do you have to pay back the deductions you got on your taxes for contributing to a traditional IRA where you convert it to a Roth?
Phrasing
Isn't the 139k assuming the person contributes 0 dollars to his 401k? So, say a person who makes 150k/yr (not allowed to contribute to roth) contributes 20k to his 401k (150k-20k=130k), then isn't it technically allowed to cause he makes 130k in this scenario?
I had no idea about this backdoor strategy!
Great Humphrey !
P.s. "Bretzel is coming" 😉
When you convert to roth, aren't you subject to retro-taxes? By retro taxes I mean the taxes that were not deducted while the account was in traditional status?
When this video says tax free I think it only applies post-conversion. Isn't he leaving out the taxes not paid while it was Traditional IRA?
question: traditional ira's have a limit IF you have a retirement account with your employer (regular 401k, roth 401k, simple, etc.). the limit is pretty low, like 70-80k for a single filer. There's no way around that, is it?
Can the backdoor go beyond the annual limit of a Roth?
Wait …….. what ……. I need more information please
Can you do both 1) normal Roth IRA & 2) Backdoor Roth using traditional IRA?
Use your 401K to adjust your MAGI and then You can Contribute directly to a ROTH IRA.
Uncle sams gonna want his money. If you do this method then you'll be paying lump some taxes during the conversion year.
Ah you finally did the video i asked for!
PAY YOUR TAXES IF POOR PEOPLE WITH MEDIAL CRAPPY JOBS GOT TOO YOU NEED TO AS WELL GUY
Fix the wording