Backdoor Roth IRA

What Is a Backdoor Roth IRA?

A backdoor Roth IRA is a strategy rather than an official type of individual retirement account. It is a technique used by high-income earners—who exceed Roth IRA income limits—to convert their traditional IRA to a Roth IRA.

Depending on your age, you can make a contribution of  either $6000 or $7000 into an individual Roth, If you earn too much for a regular Roth IRA contribution then this is where “THE BACK DOOR” comes into play.

IRA Phase Out: IRA contribution phase out AGI for single filers is $129,000-144,000 and married filers is $204,000-214,000

How Can I make contribution to The BACKDOOR Roth?

Step 1- Contribute to a Traditional IRA-  For 2022, you can contribute up to $6,000. You first contribute to a traditional IRA. A working spouse can also make contributions for a non-working (or low-earning) spouse.

Step 2 Convert your Traditional IRA to a ROTH IRA- Next, you convert the traditional IRA contribution to ROTH. Please make sure you take this step immediately. Because if you leave the money in your traditional IRA, you could have earnings, and if you have earnings, you have to pay taxes on those earnings when you do your conversion.

Step 3: Repeat the Process, each year- Each year in which you can’t fully contribute to a Roth IRA by the regular, front-door way, take advantage of the backdoor Roth.

Special rules to follow-

  1. If you already have a traditional IRA to which you made tax-deductible contributions, make sure to follow the pro-rata rule. The easiest way to avoid dealing with this rule is to have a zero balance in all traditional IRAs, SEP IRAs and Simple IRAs.
  2. Don’t remove the converted funds from your Roth IRA for at least five years if you are younger than 59½. If you remove them sooner, you will have to pay a 10% penalty unless you qualify for one of the limited exceptions.
  3. Fill out IRS Form 8606, Nondeductible IRAs when you file your tax return.

Contributing to a Roth IRA through the back door is more complicated than contributing the straightforward way, but it’s your only option if your income exceeds IRS limits. It’s worth the extra steps for many people because a Roth has extra tax benefits that a traditional IRA does not. For help in executing your backdoor Roth IRA contribution correctly, please contact us.

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