Backdoor Roth IRA - Definition

A backdoor Roth IRA is not an official type of retirement account. Instead, it is an informal name for a complicated but IRS-sanctioned method for high-income taxpayers to fund a Roth, even if their incomes exceed the limits that the IRS allows for regular Roth contributions.

1. How does a backdoor Roth IRA work?
2. Is a backdoor Roth IRA worth it?
3. Is backdoor Roth still allowed in 2020?
4. Is there a limit to Backdoor Roth IRA?
5. What is the downside of a Roth IRA?
6. What is the 5 year rule for Roth conversions?
7. Why a Roth IRA is a bad idea?
8. How do I avoid taxes on a Roth IRA conversion?
9. Can I do a backdoor Roth every year?
10. How do I report backdoor Roth on taxes?

How does a backdoor Roth IRA work?

A backdoor Roth IRA lets you convert a traditional IRA to a Roth, even if your income is too high for a Roth IRA. ... Basically, a backdoor Roth IRA boils down to some fancy administrative work: You put money in a traditional IRA, convert your contributed funds into a Roth IRA, pay some taxes and you're done.

Is a backdoor Roth IRA worth it?

If your federal income tax bracket is 32% or higher, doing a Backdoor Roth IRA is a terrible, terrible idea. ... It's nice to have tax-free money you can withdraw from in retirement. Being able to diversify your retirement income sources is always a great thing.

Is backdoor Roth still allowed in 2020?

Make a Prior-Year Conversion Before Filing Your Taxes

If you haven't filed your taxes for 2019 yet, you have until April 15, 2020, to complete a backdoor Roth IRA conversion. You can start making contributions for each new tax year beginning on January 1.

Is there a limit to Backdoor Roth IRA?

The mega backdoor Roth allows you to put up to $37,500 in a Roth IRA or Roth 401(k) in 2020, on top of the regular contribution limits for those accounts.

What is the downside of a Roth IRA?

Key Takeaways

Roth IRAs offer several key benefits, including tax-free growth, tax-free withdrawals in retirement, and no required minimum distributions. An obvious disadvantage is that you're contributing post-tax money, and that's a bigger hit on your current income.

What is the 5 year rule for Roth conversions?

The 5-year rule on Roth conversions requires you to wait five years before withdrawing any converted balances — contributions or earnings — regardless of your age. If you take money out before the five years is up, you'll have to pay a 10% penalty when you file your tax return.

Why a Roth IRA is a bad idea?

But when you're earning a lot of money, a Roth IRA could actually hurt you. You will likely be in a higher tax bracket and you'll pay more money to the government this year than you would have needed to if you'd used a tax-deferred account, like a traditional IRA.

How do I avoid taxes on a Roth IRA conversion?

The easiest way to escape paying taxes on an IRA conversion is to make traditional IRA contributions when your income exceeds the threshold for deducting IRA contributions, then converting them to a Roth IRA. If you're covered by an employer retirement plan, the IRS limits IRA deductibility.

Can I do a backdoor Roth every year?

If your income is too high, you can't contribute directly to a Roth individual retirement account, but you can get one in a backdoor way. Repeat each year, and you can amass a nice retirement kitty. ...

How do I report backdoor Roth on taxes?

Step one of the Backdoor Roth IRA is making a non-deductible contribution to your Traditional IRA. It's your responsibility to report the non-deductible contribution to your Traditional IRA at tax time on IRS form 8606, Nondeductible IRAs.