Roth IRA accounts are a fantastic tax-advantaged retirement account that allows you to grow your money tax-free. Unlike other qualified retired accounts, Roth IRA’s are funded with post-tax income and withdrawals are tax-free. Another significant benefit of Roth IRA accounts is that there are no required minimum distributions for the owner of the account - giving you more flexibility on when you choose to take distributions.
There are however contribution limitations on a Roth IRA account. First, each individual may only contribute up to $6,500/year to a Roth IRA and an additional $1,000 if you are over 50 years old (2023). In addition, for taxpayers with a filing status of Single, you can only contribute directly to a Roth IRA if your income is below $153,000 (and only the full amount if your income is below $138,000). For taxpayers with a filing status of married filing jointly, those numbers are $228,000 and $218,000 respectively.
Fortunately, there’s a type of conversion known as a “Backdoor Roth” that can allow you to contribute to a Roth even if your income exceeds those limits. The backdoor Roth is just a two-step process to moving money into a Roth IRA.
Step 1 is to create and fund a Traditional IRA account. These accounts are useful in their own right, particularly if your income allows you to tax-deduct the contribution. However, even if your income is above those limits, you may still contribute to a Traditional IRA account.
Step 2 is to convert your contribution from a Traditional IRA to your Roth IRA. If you do not currently have a Roth IRA account, you’ll need to open one to complete this process. Your IRA administrator will be able to give you the instructions and the paperwork to complete this process and we are more than happy to offer support in making this happen for you.
There are a couple of important items to note:
We’d love to be your partners in determining if the Backdoor Roth is an appropriate strategy for you and, if so, help you complete this process. Feel free to schedule some time with us to discuss this further by visiting our website at OneDayAdvice.com