Backdoor Roth IRAs are special retirement accounts that will allow individuals with high-income to make direct contributions and grow their money with tax-free capital gains. With these special retirement accounts, you will still be allowed to make tax-free withdrawals and never have to worry about required minimum distributions as you would with a normal Roth IRA account.
What are the benefits of a Backdoor Roth IRA?
One of the best things about Backdoor Roth IRA’s is the fact that they allow the same tax-free withdrawals that regular Roth IRA accounts offer. They are great choices for young investors or individuals with lower taxes than they expect they will have to pay in the future. You can also use this strategy to get around Roth IRA contribution limits. For example, the U.S government only allows individuals who make less than $203,000 a year to make contributions to a Roth IRA, which makes this a great option for anyone making over this amount looking to create or contribute to a Roth IRA.
The methods for setting up a Backdoor Roth IRA are simple:
• Place your funds in a regular Traditional IRA account
• Switch your Traditional IRA to a Roth IRA account
• Enjoy your new high-income Roth IRA account!
With a Roth IRA, you will never have to pay taxes on the principal or earnings of the amount withdrawn from your retirement account, and there are no guidelines for when you are allowed to withdraw money from your account. Moreover, money from Roth IRAs can also be transferred to heirs tax-free. These benefits make Roth IRAs a great option for high-income individuals with heirs that will be in desperate need of immediate funds.
The backdoor Roth method is by far the greatest way to get around Roth account income limits. They are best for individuals who already have a 401k or Traditional IRA looking to enjoy the tax and contribution benefits offered by a Roth IRA. Just keep in mind, to avoid penalties, make sure the money you receive to rollover into a Roth IRA is deposited into that account in 60 days or less.