Finding the Backdoor to Your Retirement

by Justin Martin

Did you know that there is a great option for high-income taxpayers to still be able to get the tax benefits of a Roth IRA without being subject to income limitations? A backdoor Roth IRA gives retirement planners the option of using Roth IRAs. This is an IRS-approved way of bypassing income restrictions and getting the benefits of Roth IRAs

In short, traditional IRA owners in all tax brackets have the option of converting these accounts into Roth IRAs with a portion of the converted amount being subject to income tax.

Here’s a breakdown on how to make a backdoor Roth IRA conversion work for you:

1. Put funds in a traditional IRA account. You can fund an existing or new traditional IRA for this first step.

2. Convert your traditional IRA money to a Roth IRA. With the guidance of an IRA administrator (or a financial advisor) you can complete this step and move money into a Roth IRA. You will receive the paperwork and instructions on this step from your financial advisor.

3. Know your taxes. You will be taxed when there is a taxable event, and your financial advisor will be able to help you estimate your tax bill. Only post-tax dollars move into Roth IRAs. When it comes time to file your tax return, be prepared to pay income tax on the money you converted to a Roth.

4. Prepare to pay taxes on the gains in your traditional IRA. This is where moving quickly from a traditional IRA to a Roth can be to your advantage. Money moves can occur as quickly as the following business day so that gains are not accumulated within the traditional IRA before they are converted to a Roth IRA. If the money in that traditional IRA has been there awhile and there are investment gains, you will owe tax on those gains at tax time.

In the end, by utilizing this backdoor entry into a Roth IRA, smart retirement planners can work towards having a healthy savings set aside in this key retirement account.