Back Door Roth IRA – The Pro Rata Rule Is Lurking
2021 Financial Planning Cheat Sheet https://www.theastuteadvisor.com/2021cheatsheet
A Back Door Roth IRA and Roth IRAs in general can be powerful tools in a retirement saver’s toolkit. The potential to accumulate a bucket of funds to be used tax free in retirement is very attractive. This is especially true when you realize how much of your 401(k) or Traditional IRAs will be taxed in the future.
Back Door Roth IRA transactions can be tricky. While there are income limits placed on Roth IRA contributions, there are no income limits to contribute to a non-deductible IRA. A non-deductible IRA is simply a regular IRA contribution without a deduction from income also known as “after tax.” However, don’t mistake income limits for contribution limits. There are still contribution limits for non-deductible IRAs.
This is where a Roth IRA conversion comes in. Converting “after tax” monies from a non-deductible IRA to a Roth IRA should result in a reduced tax bill when compared to converting a Traditional IRA (pre-tax funds). Most importantly, it allows a high income earner to get money into a Roth IRA when they would otherwise be ineligible. As a result, this strategy has been dubbed the Back Door Roth IRA.
⚠ Please don’t take this video as specific advice for your specific situation. Consult your own tax, legal and investment advisors. 👍
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