You’ve been eyeballing the Roth IRA and like the idea of tax-free growth but there's a problem: your income exceeds the limit for contributing directly to a Roth IRA. Enter the ‘Backdoor’ Roth IRA strategy- a clever maneuver that allows high earners to enjoy the benefits of a Roth IRA without income limits. There are some important caveats so let’s dive into the strategy.

Roth IRA Contribution Limits

If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $153,000 for tax year 2023 and $161,000 for tax year 2024 to contribute to a Roth IRA, and if you're married and file jointly, your MAGI must be under $228,000 for tax year 2023 and $240,000 for tax year 2024. If your Modified Adjusted Gross Income is above these limits then you are ineligible for a direct Roth IRA contribution and might consider utilizing the backdoor Roth IRA strategy.

Step by Step Guide to Executing the Backdoor Roth IRA Contribution

Step 1:

Open a traditional IRA at your custodian of choice. Ensure they are aware of, and allow for Backdoor Roth IRA conversions.

Step 1.5:
If you do not already have a Roth IRA, then also open a Roth IRA at the same custodian.

Step 2:

Make a NON-DEDUCTIBLE contribution to your traditional IRA for the tax year of your choice.

Reminder- you have until the Tax Filing Deadline to make a prior year IRA contribution. The contribution limit for 2023 is $6,500 for individuals under 50 and $7,500 for individuals over 50.

• Important Notes:
• DO NOT MIX tax-deferred IRA assets with Non-Deductible IRA assets.
• If you have a rollover IRA or Traditional IRA with tax-deferred assets in them, at ANY custodian, then you must be aware of the pro-rata rule for the conversion amount.

Step 3:

Instruct the custodian to convert your contribution from the Non-Deductible IRA to your Roth IRA.

• Important Notes:
• If you are subject to the pro-rata rule, you WILL owe taxes on any converted amount that is pre-tax.
• Timing: it is advisable to convert the non-deductible contribution to the Roth IRA as soon as possible.

Benefits of the Roth IRA

• Roth IRAs enjoy a lifetime of tax-free growth! Building up what I call the ‘triad’ of investment accounts- Taxable, Tax-Deferred and Tax-Free will provide you with the greatest flexibility once in retirement for distributions and tax management.
• No Required Minimum Distributions
• Unlike Traditional IRAs, Roth IRAs are not subject to Required Minimum Distributions over the original owners lifetime. This gives you the ability to let the assets grow and use only if needed.
• ·Estate Planning Benefits
• Even with SECURE ACT 2.0 changes, Roth IRAs are a fantastic estate planning tool.

In Conclusion

The backdoor Roth IRA. Strategy is another useful tool that allows high earners to continue saving in tax-free accounts. It is essential that you work with a financial professional to review the pro-rata rule as well as help determining the future legislative changes that may limit the future ability to perform backdoor Roth IRA contributions.

When you need reliable financial planning for your small business in Cedar Park, TX, contact Momentum Private Wealth Management at 512-416-8085 today!