how to create a backdoor roth ira
you can create a backdoor roth ira in one of three ways the custodial bank or brokerage for your ira should be able to help you with the mechanics if you have an employer managed plan you can contact the financial services firm that manages it to learn if your plan provides this opportunity order your copy of investopedia s what to do with 10 000 magazine for more wealth building advice tax implications of a backdoor roth iraremember that in an ira transfer or conversion to a roth ira you still need to pay taxes on any money in your traditional ira that hasn t been taxed for example if you contribute 6 000 to a traditional ira claim a deduction for the 6 000 on your tax return and then convert that money to a roth ira you ll owe taxes on the 6 000 you ll also owe taxes on whatever money that ira contribution earned between the date when it was contributed to the traditional ira and the date when you converted it to a roth ira 1 however if you make after tax contributions to a traditional ira that is contribute funds that are nondeductible and taxable that year these amounts will not be taxed on their transfer to the roth ira 6but if most of your ira contributions were deducted from your income and if your ira has accumulated earnings or made investments that have appreciated over a long period then most of the funds and investments that you convert to a roth ira likely will count as taxable income at the time of the conversion that could kick you into a higher tax bracket that year however you may not have to pay tax on all the money a pro rata rule applies to prevent taxing the amounts attributable to after tax contributions 6also the funds that you put into the roth are considered converted funds not contributions that means you must wait five years for penalty free access to the funds in your backdoor roth ira if you re under age 59 these converted funds differ from regular roth ira contributions which can be withdrawn anytime without taxes or penalties 7on the positive side a backdoor roth ira lets you get around the income and contribution limits that apply to traditional roth iras with a backdoor roth ira conversion these income and contribution limits don t apply benefits of a backdoor roth iraaside from getting around the limits why would taxpayers want to take the extra steps involved in doing the backdoor roth ira dance there are several good reasons for one roth iras don t have required minimum distributions rmds which means that account balances can create tax deferred growth for as long as the account holder is alive you can take out as much or as little as you want whenever you want or you can leave it all for your heirs 7another reason is that a backdoor roth contribution can mean significant tax savings over decades because roth ira distributions unlike traditional ira distributions are not taxable the main advantage of a backdoor roth ira as with roth iras in general is that you pay taxes upfront on your converted pretax funds and everything after that is tax free this tax benefit is greatest if you think that tax rates will rise in the future or that your taxable income will be higher in the years after your backdoor roth ira is established than it is now especially if you plan to withdraw after a distant retirement date 