Backdoor Roth IRA

This powerful account allows savers of any income level to make tax-advantaged investments, ultimately growing their nest eggs more quickly and efficiently over time. 

What Is A Backdoor Roth IRA?

A backdoor Roth IRA is a retirement account allowing savers to make post-tax contributions. Although you can’t deduct the contributions, they’ll grow tax-free over time and be available for withdrawals without taxes or penalties.

How Did It Get Started?

The concept of converting a traditional ira into a backdoor Roth IRA was first introduced by the Taxpayer Relief Act of 1997. This legislation allowed savers to make non-deductible contributions to a traditional IRA and convert them into Roth IRAs.

Backdoor Roth IRA Benefits

The contributions made with after-tax money are not subject to required minimum distributions (RMDs) when you reach age 70 ½ like other types of retirement accounts. 

Backdoor Roth IRA Benefits

Since you cannot contribute directly to a Roth IRA if your income is above a certain threshold, using the backdoor method allows you to get around this restriction and make tax-advantaged investments regardless of your income level. 

Set Up A Backdoor Roth IRA Conversion

Begin by contributing the maximum allowable amount to your traditional IRA, then convert that to a Roth using either an automatic or manual conversion 

Set Up A Backdoor Roth IRA Conversion

It’s essential to consider whether or not you have other retirement accounts that would be better suited for a backdoor Roth IRA. 

Disadvantages of Backdoor Roth IRA

1. Taxes are due on any money converted from a traditional IRA.  2. If you don’t properly plan for the conversion, you may end up in a higher tax bracket, potentially decreasing your return on investment.