by Daniel | Last Updated June 24th, 2021
We may earn a commission for purchases using our links, at no cost to you.
So today I am going to talk to you about what a Backdoor Roth IRA is, and how you can set one up.
So what is a Backdoor Roth IRA?
A backdoor Roth IRA is essentially for people who have relatively high incomes, and it gives them the opportunity to get past the income limits that are associated with a Roth IRA.
So for 2021, this will be useful for individuals with a modified adjusted gross income of over $140,000, and for anyone filing jointly as a married couple earning over $208,000, As these are the income limits for a Roth IRA.
Now just to clarify the difference between a traditional IRA and 401K to a Roth IRA.
With a Traditional IRA and 401K initially, they both give you an immediate tax advantage on your income by delaying income taxes on any money that is deposited into the accounts.
When you do retire and start to take withdrawals from these accounts you will be liable to pay taxes on both the money that was initially invested and any investment profits that were made.
As for a Roth IRA, the money that is put into the account is and must be Post taxable income from the year that you deposit the money.
If and when you do decide to take any withdrawals from the account, assuming it is after the age of 59½ and you have held the account for at least 5 years You will not need to pay any income tax on either the initial money put in or any profits made.
How To Create a Backdoor Roth IRA
So there are a few ways to create a backdoor Roth IRA:
The first way is to put money into a traditional IRA and then roll over the funds into a Roth IRA Account, you can also just choose to use any existing money that might be in your traditional IRA and just Roll that over instead.
One more way to create a Backdoor Roth IRA would be to make an after-tax contribution to a 401K plan and then just roll it over to a Roth IRA.
Now in creating a backdoor Roth IRA you will have to pay taxes on any investment gains or any money that hasn’t been taxed that is being converted.
So if you took any tax deduction on your traditional IRA you will need to give that tax deduction back if you create a backdoor Roth IRA.
So wherever your Traditional IRA is held whether it is with a bank or brokerage, they should be able to help you with the process of creating a backdoor Roth IRA.
Things To Considering When Creating a Backdoor Roth IRA
Once you have transferred any money to a Roth IRA if you withdraw any funds before 5 years is up you may owe taxes on any profits made and a 10% early-distribution penalty.
There are No Minimum distributions
Unlike a 401k or traditional IRA account where you are required to make a minimum withdrawal each year after the age of 72, a Roth IRA has no distribution requirements at all during the lifetime of the account holder.
Also, It is possible that a withdrawal from your traditional IRA could push you into a higher tax bracket, so be mindful of how much you decide to transfer so as to avoid going into a higher tax bracket.
It offers Tax Free distributions
After the age of 59½ and having held an account for at least 5 years, you will be able to take distributions that include any earning without paying any federal taxes.
Ok, so that’s just a quick explanation of what a Backdoor Roth IRA is and how to create one.
If you do want to create one it is always best to consult a CPA first (Certified Public Accountant) to make sure it is in your best interests.
DESTINATIONS
New York City
London
Miami
Monaco
Los Angeles
Cannes
Geneva
Rome, Italy
RECENTLY REVIEWED
10 Best Luggage Sets
Best Carry-on Luggage Reviewed
10 Best Backpacks To Buy Now
Top Travel Accessories Reviewed
Best Men’s & Women’s Wallets
10 Most Comfortable Travel Pillows
Top-Rated Travel Adapters
10 Of The Best Toiletry Bags
Best External Hard Drive For Travel
10 Best Cruise Lines
Best VPN for Travel
Best Herschel Backpack For School