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Want to Enjoy Tax-free Retirement Savings? Consider a Backdoor Roth IRA

June 13, 2024

Attention taxpayers…do you want to boost your tax-free retirement savings? A “backdoor” Roth Individual Retirement Account (IRA) could be the answer. Let’s explore the benefits of this tool.

Does your income exceed the limit for Roth IRA contributions? Consider the benefits of a “backdoor” Roth IRA. We have the details here.

What are the income limitations for Roth IRA contributions?

Contributions to Roth IRAs are subject to income limitations. For 2024, the income limit for Roth IRAs is $161,000 for singles and $240,000 for married individuals filing jointly.

What is a back-door Roth IRA?

A backdoor Roth IRA is a method used by high-income earners to contribute to a Roth IRA indirectly, bypassing the income limits that typically prevent them from making direct contributions.

If you exceed these limits, a backdoor Roth IRA is a great option that allows you to take advantage of the unique benefits of Roth IRAs. These benefits include tax diversification, long-term tax planning, estate planning and flexibility in retirement.

How does it work?

Here are the typical steps to opening a backdoor Roth IRA:

  1. Open a traditional IRA and make a nondeductible contribution (up to $7,000 in 2024, or $8,000 if you’ll be age 50 or older on Dec. 31, and no MAGI phaseout applies).
  2. Convert the traditional IRA to a Roth IRA. There should be some consideration given to the timing of the conversion after the initial contribution. Don't wait too long as earnings could build creating income on the conversion. However, there could be issues with the taxing authorities viewing the conversion being collapsed into one transaction with the contribution. Make sure to discuss the implications with your tax advisor.

Normally the entire converted amount is taxable in the conversion year. But with a backdoor Roth IRA, if you don’t have any other traditional IRAs, the only tax due will be on any growth from the contribution date to the conversion date — likely a nominal amount.

Can you use the backdoor technique if you have one or more traditional IRAs?

Yes, but keep in mind that this triggers some income taxes on the conversion. You are required to recognize a prorated portion of the earnings across all traditional IRA accounts as income even if only converting one specific account. An analysis should be done to determine the magnitude of the income before moving forward.

While an additional $7,000 or $8,000 a year might not sound like a lot, it can increase dramatically over time, especially when growth compounds tax-free. Would you like more information on backdoor Roth IRAs or other ways to take advantage of tax-free Roth retirement savings?

June Landry CTA

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