(Stefon Walters)
Both traditional and Roth IRAs are retirement accounts that make saving for retirement more manageable. The problem, however, that some may face is the income limit put in place that limits who can contribute to a Roth IRA. For tax year 2021, single filers making over $140,000 and married couples (filing jointly) making over $208,000 annually are ineligible to contribute to a Roth IRA.
Although high-income earners may not be able to contribute directly to a Roth IRA, they can utilize what’s commonly referred to as a “backdoor Roth IRA.” A backdoor Roth IRA isn’t an official retirement account; it’s a method used to get around the Roth IRA income limit.
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1. Creating a backdoor Roth IRA is about converting accounts
Creating a backdoor Roth IRA can be done in two general steps:
- Contribute to a traditional IRA account: Luckily, traditional IRAs don’t have an income limit, so anyone is eligible to contribute to it. If you already have a traditional IRA, simply contribute to it. If you don’t currently have one, you can open an account and contribute your desired amount.
- Convert your traditional IRA to a Roth IRA: Once you’ve contributed the desired amount to your traditional IRA, reach out to your IRA plan provider and inform them you want to convert funds to a Roth IRA. This process may look different for different IRA plan providers, so it’s important to check with your plan administrator. If you don’t currently have a Roth IRA, you’ll open one during conversion.
Once you’ve successfully converted funds from a traditional to a Roth IRA, you’ll want to begin preparing for the tax implications of this move.
2. You’ll owe taxes on backdoor Roth IRAs
One of the key benefits of a traditional IRA is that your contributions are tax-deductible. The amount you’re eligible to deduct depends on if you or your spouse are covered by a retirement plan at work. Roth IRAs, on the other hand, are meant to be funded with after-tax money. So, if you deduct your traditional IRA contributions and then decide to convert them to a backdoor Roth IRA, you’ll likely be subjected to income taxes.
For example, if you contributed $6,000 to a traditional IRA — the max allowed …….
Source: https://pantagraph.com/business/investment/personal-finance/3-things-to-know-about-backdoor-roth-iras/article_282654f8-286c-5101-82f0-0d5a71df773b.html
