Backdoor Roth IRA

Hey welcome to family wealth. Plenty partners on Brian Ramsey. This is our weekly podcast series and today’s topic is how to contribute to a Roth IRA a when your income exceeds the limitations. Let’s first back up and talk about what is a Roth IRA right. Now know most people have either heard about or read about them maybe invest in one already but there’s a couple of things you need know better Roth IRA. Number one all contributions are made with after tax dollars so money you’ve already pay tax on then you’re making contributions to the account. The assets in the account when they’re invested. Grow tax free. That’s a good thing. And the distributions are tax free as well. What you receive fifty nine and a half. Now there’s some other ways to get access to that tax free. That’s for another show we’ll discuss that and another topic you your contribution limits for two thousand nineteen or six thousand dollars if you’re younger than the age of 50. If you’re over the age of 50 you can contribute an additional thousand or seven thousand dollars. Now here’s the key to this. If you are an individual and you make more than one hundred twenty two thousand dollars you start to phase out of the ability to contribute to a Roth. Mary couple filing joint their income limitations one hundred ninety three thousand dollars. So we have several clients that are in this predicament. So the question that I get is ok my income exceeds those limitations. How do I contribute to a Roth. The main thing that we do is we do what we call a backdoor Roth IRA. That’s kind of what we want to talk about. So how do we do that. What we first contribute to an IRA. And we do that with a non deductible contribution to an IRA. And then we immediately convert those dollars over to a Roth. So let’s say for example Clyde put six thousand dollars in an IRA a non deductible. Then we immediately usually the next day move that six thousand dollars over to the Roth IRA. Now this was the ability was given to us several years ago and tax reform of 2010. And it said that if you had not any money in an IRA you can convert that over to a Roth IRA. Now here’s the catch to that. The government allowed us to do that because they wanted us to have pre-tax dollars. And when we convert that over we paid tax on that money. However it’s very important understand that a backdoor Roth IRA really only works when you’re making a non deductible IRA contribution which means you’re making it with after tax dollars not pre-tax dollars and then you’re converting it over to Roth. Now in some cases we have clients that have money that’s in an IRA and it’s pre-tax dollars. We have calculations that we can work with the client on to see if it makes sense for them. To move that money over to a Roth. That money that is pre-tax would be taxable to them. But it still might make sense to move those dollars over to the Roth IRA anyway. And again there’s a calculation we can walk clear through to see if that makes sense to do that. But the purpose behind a backdoor Roth IRA is to get money into a Roth IRA. When you exceed the income limitations. So if you’ve got questions on how we do this if you just want more information on a backdoor a Roth IRA feel free to give us a call or send us an e-mail. We’d be happy to get you whatever information you need or would like or be happy to answer questions.

Thanks for watching and we’ll catch you next week.