As tax season looms, many traders, investors, and tax specialists are eyeing ‘Backdoor Roth IRA’, a strategic method promoted by tax and IRA specialist Ed Slott. This technique allows high-income earners to navigate around the IRS-imposed income restrictions for Roth IRA contributions.
‘Backdoor Roth IRA’ involves putting funds in a regular IRA and then converting them to a Roth IRA. Intriguingly, no income restrictions exist for these conversions. Hence, this method is a savvy way to save for retirement, especially with its potential tax benefits. Retirees typically receive the disbursements from a Roth IRA tax-free, enhancing its desirability for retirement planning.
While ‘Backdoor Roth IRA’ might sound questionable, it’s entirely legal, and both the IRS and Congress have verified this. However, due to previous misconceptions or lack of thorough understanding, some investors still show reservations. Therefore, potential users should inform themselves about the possible tax implications and other intricacies to make an educated investment decision.
Roth IRA has two main components: annual cap provisions and conversions. In the case of ‘Backdoor Roth IRA’, the latter isn’t as significant as the former. The annual cap provisions determine the maximum amount you can contribute to a Roth IRA annually, which is usually $6,000 or $7,000 if you’re 50 or older. However, high earners may see this limit reduced or scrapped altogether.
The income caps are a deciding factor in making yearly Roth IRA contributions. For the tax year 2024, couples filing jointly must earn less than $240,000, and individual filers, less than $161,000, to contribute openly. Unlike Roth IRAs, traditional IRAs impose no earning limits on contributions
The ‘Backdoor Roth IRA’ strategy entails making a non-deductible investment in a traditional IRA, surrendering the related tax benefit to bypass income limits. These funds are then transferred to a Roth IRA. Essentially, this means, while the end game of adding funds to a Roth IRA remains unchanged, the method involves a conversion rather than a contribution.
The ‘Backdoor Roth IRA’ process unfolds in two steps. First, you deposit funds in a traditional IRA which you later convert into a Roth IRA. Notwithstanding the complexity around this strategy, the ‘Backdoor Roth IRA’ remains a viable solution for high-income earners hoping to contribute to a Roth IRA.
