Fear not if you’ve found yourself hitting the income limits for direct Roth IRA contributions. The Backdoor Roth IRA might be your ticket to tax-advantaged growth.

In this step-by-step guide, we’ll walk you through the process, from laying the groundwork with a traditional IRA to navigating the conversion to a Roth. Plus, we’ll highlight key considerations and provide expert tips to ensure you’re maximizing your retirement savings potential. Ready to embark on this financial journey? Let’s dive in!

  • Confirm that you cannot contribute directly to a Roth IRA due to income limitations. 2024 for example, single filers with a modified adjusted gross income (MAGI) above $144,000 and married couples filing jointly with MAGI above $214,000 are ineligible for direct contributions to a Roth IRA.
  • Contribute to a Traditional IRA: Make a nondeductible contribution to a traditional IRA. Ensure you’re not contributing more than the annual IRA contribution limit, which is $6,000 for individuals under 50 in 2024 (or $7,000 if you’re 50 or older).
  • Wait for the Contribution to Clear: Allow time for the funds to clear in your traditional IRA account after contributing. This typically takes a few business days.
  • Convert Traditional IRA to Roth IRA: Once the contribution has cleared, convert the traditional IRA funds to a Roth IRA. This can usually be done online through your brokerage or financial institution.
  • Consider Tax Implications: Be aware of any tax implications of the conversion. Since you made a nondeductible contribution to the traditional IRA, only the earnings (if any) will be subject to taxation upon conversion. The tax impact should be minimal if there are minimal or no earnings.
  • Report the Conversion: When you file your taxes for the year of the conversion, report the conversion on IRS Form 8606. This form helps you track the basis in your IRA accounts and ensures you’re not taxed twice on the same money.
  • Repeat Annually: If you plan to make Backdoor Roth IRA contributions in future years, repeat this process annually. Keep in mind any changes to contribution limits or eligibility criteria that may occur.

Remember, it’s essential to consult with a tax advisor or financial planner familiar with your financial situation to ensure that a Backdoor Roth IRA is appropriate for you and that you follow all tax laws and regulations correctly.

Schedule a call and we’ll help you set this up.

 Michael Tannery CPA CDFA® AIF® ● CEO

Registered Principal | Tannery & Company

 The opinions expressed in this material are for general informational purposes only and are not a substitute for professional advice.  Individual circumstances do vary. Independent Financial Group (IFG) does not give tax advice. IFG Registered Representatives (RR) do not provide tax advice while acting as a RR.

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