What is a Backdoor Roth IRA?Submitted by O'Grady Financial Group on February 26th, 2019
Hey everybody, O’Grady here. Who wouldn’t want their money to grow and when the time comes to reap all the growth, pay no taxes. That’s the beauty of the Roth IRA.
It’s so beautiful and attractive that the IRS puts some caps on how much you can contribute and how much you’re allowed to make to even be allowed to contribute. If you make too much money, you can’t make a direct contribution to a Roth. But there is a work around. We’ll dig into that just ahead.
You’re doing well, making good money, moving up in your career. You know all about the benefits of a Roth IRA, but you’re shut out from making contributions because you’re making too much money.
Roth eligibility starts to phase out at $122,000 of income for singles and $193,000 for couples in 2019.
So if you can’t take a direct flight to a Roth IRA, how about a layover in a Traditional IRA. You can loiter as long as you’d like in the IRA lounge, or book the next trip right to the Roth.
Here’s how it works. Anyone can make a contribution to a Traditional IRA as long as they have earned income and are younger than 70.5. The contribution may or may not be tax deductible depending on participation in an employer’s retirement plan and certain income levels. Making a contribution to a Traditional IRA is leg one of this journey.
Anyone with money in a Traditional IRA can convert that money into a Roth IRA whenever they’d like to. There are no caps on conversion amounts or income limits. Step 2 is simply convert the IRA contribution into the Roth.
There’s your Back Door Roth. Two steps instead of one…a contribution and a conversion rather than just a direct contribution. Before executing the Back Door Roth strategy, always consult with your tax advisor to be sure it’s appropriate for you.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.