Did you know that there is a great option for high-income taxpayers to still be able to get the tax benefits of a Roth IRA without being subject to income limitations? A backdoor Roth IRA gives retirement planners the option of using Roth IRAs. This is an IRS-approved way of bypassing income restrictions and getting the benefits of Roth IRAs
In short, traditional IRA owners in all tax brackets have the option of converting these accounts into Roth IRAs with a portion of the converted amount being subject to income tax.
Here’s a breakdown on how to make a backdoor Roth IRA conversion work for you:
- Put funds in a traditional IRA account. You can fund an existing or new traditional IRA for this first step.
- Convert your traditional IRA money to a Roth IRA. With the guidance of an IRA administrator (or a financial advisor) you can complete this step and move money into a Roth IRA. You will receive the paperwork and instructions on this step from your financial advisor.
- Know your taxes. You will be taxed when there is a taxable event, and your financial advisor will be able to help you estimate your tax bill. Only post-tax dollars move into Roth IRAs. When it comes time to file your tax return, be prepared to pay income tax on the money you converted to a Roth.
- Prepare to pay taxes on the gains in your traditional IRA. This is where moving quickly from a traditional IRA to a Roth can be to your advantage. Money moves can occur as quickly as the following business day so that gains are not accumulated within the traditional IRA before they are converted to a Roth IRA. If the money in that traditional IRA has been there awhile and there are investment gains, you will owe tax on those gains at tax time.
In the end, by utilizing this backdoor entry into a Roth IRA, smart retirement planners can work towards having a healthy savings set aside in this key retirement account.
1. Using a backdoor Roth IRA removes income limitations to entry into this retirement savings tool.
2. With the help of a financial advisor, money can be moved from a traditional IRA to a Roth IRA.
Justin Martin is a Senior Wealth Advisor for Legacy Wealth Management, with his office based in the Salt Lake City area. Justin works with small business owners and doctors throughout the United States and is passionate about helping individuals prepare for a robust financial future. Justin completed his Master of Business Administration (MBA) at Texas A&M University and completed his undergraduate studies at Brigham Young University. Justin is FINRA series 65 licensed, has been working as a Wealth Advisor since 2006, and is currently a board member with the International Association of Registered Financial Consultants. He also works as an adjunct professor of microeconomics and loves studying financial systems. Justin and his wife Megan have four kids and love all things active and musical.
This document is provided for educational purposes only. All investment strategies have the potential for profit or loss. No investment strategy can guarantee positive returns. The information contained in this document should neither be construed as a provision of personalized investment advice nor as a guarantee that a certain level of results will be achieved. Under no circumstances should this information be construed as an offer to sell or a solicitation of an offer to buy any particular service or product.