Saving for retirement is a top priority for many people. Fortunately, there are programs and investment options to help people make the most of their retirement bucks. As a result of lower taxes created by President Trump’s 2018 tax reform, this may be the time to consider setting up a backdoor Roth IRA.
Traditional IRAs
A traditional individual retirement account (IRA) is funded with pre-tax dollars. Not only does this lower your income taxes, but you should also realize a tax deduction on your annual tax return. You will not pay taxes on the money contributed to your IRA, but withdrawals typically are taxable.
Taxes play an important role in deciding whether to open a traditional IRA or a Roth IRA.
The Roth IRA
Unlike a traditional IRA, Roth IRAs are funded with after-tax dollars. Owners of Roth IRAs are not entitled to an income tax deduction on their annual contributions. However, withdrawals are generally tax-free.
You can fund Roth IRAs through:
- Regular contributions to the account,
- Contributions from your spouse,
- Transfers,
- Rollover contributions, and
- Conversions
The final funding method – conversions – is an integral part of the backdoor Roth IRA.
The Backdoor Roth IRA Strategy
Current tax rates make the Roth IRA attractive. However, there are income limits that block people from taking advantage of this type of IRA. You might be eligible to use the following strategy to fund a Roth IRA, even if your income exceeds the limit.
After contributing to a traditional IRA, convert it to a Roth IRA. Since after-tax dollars funded the account, most people can avoid paying taxes on withdrawals.
However, the backdoor Roth IRA is not the answer for everyone. People who own more than one traditional IRA might not be eligible to use this strategy. Also, individuals with “extensive retirement assets in deductible traditional IRAs” should consider all their options before attempting this strategy.
This Might Be the Time to Consider a Backdoor Roth IRA.
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Attorney Robert Slutsky was one of the first lawyers in Pennsylvania to focus on elder law issues, including Medicaid. Since 1992, he has helped countless people find solutions that work for their individual situations.
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