Are you tired of being held hostage by traditional IRA rules and regulations? Are you ready to take control of your financial future and sneak your way to retirement success? Then it’s time to learn about the backdoor Roth IRA.
First things first, what is a backdoor Roth IRA? Simply put, it’s a way for individuals who earn too much money to contribute directly to a Roth IRA to still benefit from the tax-free growth and withdrawals that a Roth offers. How is this possible? By converting a traditional IRA (that you are allowed to contribute to based on your income level) into a Roth IRA.
Here’s how to set up your own backdoor Roth IRA:
Step 1: Open a traditional IRA account. If you already have a traditional IRA, you can skip this step. Just make sure it’s a traditional IRA and not a SEP or SIMPLE IRA, as these have different rules for conversions.
Step 2: Contribute to your traditional IRA. The maximum contribution limit for 2021 is $6,000 (or $7,000 if you’re over 50). You can contribute to your traditional IRA even if you have a 401(k) or other employer-sponsored retirement plan.
Step 3: Convert your traditional IRA to a Roth IRA. This is where the backdoor magic happens. Simply contact your traditional IRA provider and request a conversion to a Roth IRA. Keep in mind that you will have to pay taxes on the amount you convert, so make sure you have the funds available to cover the tax bill.
Step 4: Wait five tax years. This is an important step to avoid the IRS’s “five-year rule” for Roth IRA conversions. As long as you wait at least five tax years from the first year you made a contribution to your traditional IRA, you can withdraw your converted funds tax-free.
Step 5: Enjoy your backdoor Roth IRA! Now that you’ve set up your backdoor Roth IRA, you can sit back and watch your money grow tax-free. Just remember to follow the contribution and withdrawal rules for a Roth IRA to avoid any financial pitfalls.
So there you have it – a simple five-step guide to setting up your own backdoor Roth IRA. With a little bit of planning and some stealthy financial maneuvering, you can enjoy the benefits of a Roth IRA without being held back by income limits. Happy saving!