The Roth IRA has one big advantage over the Traditional IRA: earnings are tax-free. Unfortunately, there is one disadvantage over the Traditional IRA: it requires you to have a MAGI of $203,000 or lower in order to contribute to a Roth IRA. There are some situations in which it makes sense to contribute to a Traditional IRA, and then immediately roll it over to a Roth IRA. This is called a Backdoor Roth IRA Contribution.
Is your MAGI greater than $203,000 (married) or $137,000 (single)?
If your MAGI is lower than the amounts detailed above, you are able to contribute directly to a Roth IRA. See the “Can I Contribute to my Roth IRA?” flowchart. If you are over the income limit, move on.
At the end of this year, will you be age 70.5 or older?
If you answered “yes”, you will be ineligible to make a contribution to a Backdoor Roth IRA Contribution. If you are younger than 70.5 at the end of this year, move on to the next question.
Do you have an existing pre-tax Traditional, SEP, or Simple IRA?
If you answered “no”, you will be able to do a Backdoor Roth IRA Contribution. If you do already have an existing pre-tax account, you will still be able to do a Backdoor Contribution, but you may be subject to aggregation and pro-rata rules.
Backdoor Roth IRA Contributions can have severe tax and penalty implications if they are not done correctly. Check out this flowchart to learn more.
If you would like to schedule a call to talk about the best strategies for Roth IRA contributions or retirement planning in general, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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