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What You Should Know about Backdoor Roth IRAs

  February 25, 2020  |    #Tools

What is a backdoor Roth IRA

Heard of a backdoor Roth IRA? Yes, it IS a thing. And, no, it’s NOT something you do in the bedroom! A backdoor Roth IRA is a way to save for retirement if you want the benefits of a Roth IRA but don’t qualify for one.

Hear when and why to use a backdoor Roth IRA:

The when, why and how of backdoor Roth IRAs

On this episode of Queer Money®, we’re sharing what you need to know about backdoor Roth IRAs. We review the tax benefits of the Roth IRA as well as its income limits on contributions, explaining how the backdoor Roth affords people who earn too much in a given year the advantages of a Roth—without the restrictions.

We also discuss the results of our Queer Money® Facebook Group poll on taxable income, define the concept of modified adjusted gross income (MAGI), and offer examples of circumstances when YOU might take advantage of a backdoor Roth IRA. Listen in for the step-by-step process of initiating a backdoor Roth IRA and learn how a financial advisor can help you (no matter how much you make) take advantage of loopholes like this one!

Topics covered on backdoor Roth IRAs

A high-level overview of backdoor Roth IRAs

  • Loophole for those who earn too much to qualify for Roth
  • Roth limits = $124K for individual, $196K for married

The definition of modified adjusted gross income (MAGI)

  • Gross = total income from employer or business
  • MAGI = gross – itemized deductions and personal exemption allowance

When an average income earner might use a backdoor Roth IRA

  • Inheritance from family member passing
  • Investment income from the sale of stocks
  • Abnormally high commission (e.g.: real estate agent)

Why you might want to use a backdoor Roth IRA

  • No taxes on investment growth or withdrawals
  • No minimum distribution requirements

Our Facebook group taxable income poll results

  • 85% said taxable income higher AFTER retirement
  • 12% said taxable income higher BEFORE retirement

The difference between a Roth conversion and a backdoor Roth IRA

  • Conversion = move money from existing traditional to Roth
  • Backdoor = put money in new traditional, then move to Roth
  • Both taxable events, but owe capital gains tax in conversion

How to initiate a backdoor Roth IRA

  1. Open NEW traditional IRA and Roth IRA
  2. Deposit surplus of money in traditional
  3. Immediately convert money to Roth

Resources for retirement savings

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