A Roth IRA (Individual Retirement Account) is a type of retirement savings account that can be a good option for some individuals due to its unique features, such as:
- Tax-free withdrawals: Contributions to a Roth IRA are made with after-tax dollars, meaning that contributions have already been taxed. This means that withdrawals from a Roth IRA in retirement, including any investment gains, are tax-free.
- No age limit for contributions: Unlike traditional IRA, there is no age limit for contributions to a Roth IRA, which means you can continue to contribute to a Roth IRA even after age 70.5 (subject to additional rules)
- No required minimum distributions: Traditional IRA’s are subject to Required Minimum Distributions (RMD) at age 72, Roth IRA’s don’t have that requirement, which means that you can leave the money in the account for as long as you want, and allow it to continue growing tax-free.
- Flexibility: Roth IRA’s provide more flexibility when it comes to contributions, withdrawals and distribution.
- Income limitations: Roth IRA contributions are limited to individuals below certain income limits. However, if you’re above those income limits, you can still make a contribution to a Roth IRA through the “backdoor Roth IRA” strategy, as described below.
- Diversification: Roth IRA’s can be a good way to diversify your retirement savings. In addition, Roth IRA’s can also be a good option for individuals who expect to be in a higher tax bracket in retirement.
It’s important to remember that Roth IRA’s are long-term savings vehicles and should not be used for short-term savings goals, and it’s always best to consult with a financial advisor to determine if a Roth IRA is the right choice for you and your retirement savings goals.
A Backdoor Roth IRA is a strategy that allows individuals to make contributions to a Roth IRA even if their income exceeds the income limits for Roth IRA contributions. The strategy involves making a non-deductible contribution to a Traditional IRA and then converting that contribution to a Roth IRA.
Here’s how it’s done:
- Make a non-deductible contribution to a Traditional IRA. The contribution limits for 2022 is $6,000 and $7,000 for individuals over the age of 50.
- Wait for a period of time, such as overnight, to ensure the contribution has settled and is no longer commingled with any pre-existing Traditional IRA assets.
- Convert the non-deductible contribution from the Traditional IRA to a Roth IRA. This is known as a “backdoor” Roth contribution, as it allows you to make a contribution to a Roth IRA even if you’re not eligible to do so directly.
It’s important to note that there may be tax implications with a Backdoor Roth IRA, and it is advisable to consult with a tax professional and financial advisor before attempting it. Also, there could be pro-rata rule, which in short means, if you have pre-existing traditional IRA, your conversion will be partially taxed among other nuances and rules.
Also, it is important to keep track of your basis (non-deductible contributions) in Traditional IRA, so that you can accurately report it when you do the conversion.
Disclosure: Inclinevest is a Registered Investment Advisor in the state of Colorado and other jurisdictions where permitted. This communication is for informational purposes only and should not be construed as legal, accounting, and/or tax advice. Should you have any questions and/or issues in these areas, please consult your legal, tax, and/or accounting adviser. Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.