What is a Backdoor Roth?

A backdoor Roth is a strategy for high income earners, where they make a nondeductible contribution to their IRA account and then convert that contribution to their Roth account.

*A nondeductible contribution is post-tax.*

Who should take advantage of this strategy?

This is a useful strategy for any individual making over $150,000.00 or a married couple making over $236,000.00 (filing jointly) to grow an investment account tax free where the withdrawals are also tax free.

Why should I consider making a backdoor Roth contribution?

Roth contributions grow tax-FREE, unlike a traditional IRA, where the contribution grows tax-DEFERRED. In other words, after paying the initial tax on the nondeductible contribution, an individual will not ever pay tax on that money again. So, the funds can be invested and grow for as long as the owner of the account wants.

How do withdrawals from a Roth account work?

Just like with a traditional IRA, the owner can start making withdrawals from the account either when they are 59 ½ or when they retire (whichever happens first), and the converted funds must have been in the account for at least 5 years. These withdrawals are tax-free.

Another difference from a traditional IRA is that a person does not ever have to take a withdrawal from a Roth account. There are no required minimum distributions.

What happens if I never make a withdrawal from my account or there are still funds in the account when I pass away?

The account passes to the beneficiary and the earnings and withdrawals remain tax-free.

Should I consider a Roth IRA account as an estate-planning tool?

Absolutely! If you are looking to pass on assets without a tax drag, a Roth IRA is a great way to do so, because your beneficiary will receive a tax-free account on which they will never owe taxes.

How do I know if a backdoor Roth is right for me?

Deciding if a backdoor Roth is the right strategy for you involves a conversation with your accountant to ensure that this strategy is worthwhile given the taxes you will owe up front.

Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.

Income may be subject to local, state and/or the alternative minimum tax.

10% IRS penalty may apply to withdrawals prior to age 59 ½.

A diversified portfolio does not assure a profit or protect against loss in a declining market.

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Retirement plan withdrawals may be subject to taxation and penalties when withdrawn early.