Jul 31 in General Tax Savings Discussion
Take Advantage of the Backdoor Roth IRA
Hey all,
Let’s talk about a savvy strategy for high-income earners who want to reap the benefits of a Roth IRA: the Backdoor Roth IRA. This method allows you to sidestep the income limits and enjoy tax-free
growth and withdrawals.
What is a Backdoor Roth IRA?
A Backdoor Roth IRA is a way for high-income earners to convert a traditional IRA into a Roth IRA, allowing you to take advantage of a Roth IRA’s tax benefits.
Steps to Set It Up:
- Contribute to a Traditional IRA: Since there are no income limits for contributions to a traditional IRA, this is your first step.
- Convert to a Roth IRA: Convert the traditional IRA into a Roth IRA. This conversion is taxable, but future growth and withdrawals will be tax-free.
Benefits:
- Tax-Free Growth: Once converted, your investments grow tax-free.
- Tax-Free Withdrawals: Qualified withdrawals in retirement are tax-free.
- No RMDs: Unlike traditional IRAs, Roth IRAs have no required minimum distributions (RMDs).
Example:
Let’s say you contribute $6,500 to a traditional IRA. Afterward, you convert it to a Roth IRA. You’ll pay taxes on any earnings at the time of conversion, but future growth and withdrawals will be tax-free.
Pro Tip:
To minimize taxes, convert your traditional IRA to a Roth IRA as soon as possible, ideally before significant earnings accumulate.
Who’s using the Backdoor Roth IRA strategy? Let’s share our experiences and tips!
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Take Advantage of the Backdoor Roth IRA
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