The Backdoor Roth IRA is a tax strategy for high income earners to contribute money into Roth IRA every year.
Roth IRA accounts allow tax-free growth and tax-free withdrawals after age 59 1/2 but individuals over the income limits cannot contribute directly to Roth (1). In 2024, the Roth IRA modified adjusted gross income limit for single individuals is $161,000 and for married couples is $240,000.
The “Backdoor Roth IRA” can allow people over the income limits to contribute money into a Roth IRA each year.
Here is an explanation of the process:
1) Contribute to a traditional IRA. In 2024, the maximum annual contribution is $7,000 for those under age 50 and $8,000 for those over age 50.
2) Do not invest the money in the traditional IRA.
3) Convert the Traditional IRA balance to a Roth IRA.
4) Invest the Roth IRA balance.
NOTE: You will want to have a $0 balance in any traditional IRAs, Rollover IRAs, SEP IRAs, or SIMPLE IRAs by the end of the year in which you are doing this strategy. These accounts can be moved to 401(k)s, 403(b)s, or 457 plans instead. If you do not clear out IRA balances, you may be subject to the pro-rata rule which can make some or all the transaction taxable.
In my opinion, this strategy is a no-brainer for individuals over the Roth IRA income limits because you are unable to get the tax deduction from a traditional IRA anyways (income will be over the phaseout for traditional IRA deductibility). So, you should be contributing as much as you can into a tax-free bucket each year.
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