The backdoor Roth IRA-its name makes it sound sneaky. It sounds stealthy. It sounds like a way to beat the system. But what is it really?
High-earning taxpayers are not allowed to contribute to a Roth IRA—why? That’s an excellent question for the government. Backdoor Roths are a legal way to circumvent this. There is nothing sneaky about it!
To do complete a backdoor Roth, you:
You have to be careful; the above only works when you have 0 funds in:
If you complete a backdoor ROTH and have money in these types of accounts, the backdoor Roth WILL have tax consequences.
Why, oh why, would anyone go through all the trouble to create a backdoor Roth? For one thing, Roth IRAs give you tax-free distributions. This is desirable if you think you will have a higher income in the future. They also do not have required minimum distributions (RMDs). All of your money can stay invested for as long as you want.
If you would like to do this, keep in mind that all transactions are considered to occur in the year they happened. Unlike regular contributions to IRAs, which may be done by April 15 th of the following year, all backdoor Roth activity must be done by the end of the calendar year.
While there is nothing sneaky about the backdoor Roth IRA, it is under fire as it does provide wealthy taxpayers with potentially significant tax savings. Had the Build Back Better Act been signed into law, it would have significantly changed the rules regarding backdoor Roth IRAs. If you are interested in creating a backdoor Roth IRA, you may want to keep this in mind.
Jennifer Thonert
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