In follow up to my last video and blog about Roth IRA’s, some wanted more information on the backdoor Roth IRA strategy. What you need to know is that while there are income limits in place for who can contribute to a Roth IRA, there are not for Roth conversions!

So how does this work?

Someone who is ineligible for a Roth IRA contribution, can contribute nondeductible dollars to a Traditional IRA account and then immediately convert those dollars to a Roth IRA account.

Why is this beneficial?

Some investors really like the idea of paying their taxes now rather than later, even if they are in a higher tax bracket. This allows individuals in that situation to put away money for tax free retirement income. The other situation could be someone who has access to an employer sponsored plan (such as a 401k), but they want to put more away than what is allowed in that plan. 

Do I pay taxes on the conversion?

If you are converting nondeductible funds, then there should be no additional taxes associated with the conversion. HOWEVER, if you have an IRA with funds that were deductible, and then you try to add nondeductible funds for conversion; then there will be taxes owed based on the amount of deductible vs nondeductible retirement assets.

Is a backdoor Roth right for me?

Whether or not a backdoor Roth is appropriate should be looked at in a case by case basis. This is not a good option for everyone but it is for some. If you would like help in determining if this is a good option for you, reach out to us at Oak Road Wealth Management!

-Brent Murff

(816) 607-9188

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