Backdoor Roth IRA: What is it? How Does it Work? Can Pre-Retirees Benefit From One?

In this video, you will learn how pre-retirees in Rockford can use a backdoor Roth IRA. We will also cover what is a backdoor Roth IRA and how do you benefit from one? 🛠 Resources 🛠 💻 How to increase your retirement income & avoid running out of money in retirement by making ONE simple change to your finances: 🗓 Schedule a call: ▶️ Related Video: Is LIRP a good investment? 🔗 Website: I’m going to be going over a few things: What a Roth IRA is What makes a Roth IRA attractive to many people What a backdoor Roth IRA is, and who would benefit from one If there are other tax-exempt assets that might work even better What is a Roth IRA? Many are familiar with a traditional IRA or a 401K, a retirement arrangement with the government where you’re allowed to put money away on a pre-tax basis. Before any taxes, you can trim that money off the top of your income. So let’s say you make $100,000 a year, and you put $6,000 into a traditional IRA or 401K. Instead of reporting $100,000 of income, you only have to report $94,000 of income, which means you’re paying tax on less income. That’s a traditional IRA. It grows, tax is deferred, you get interest on your interest for many years until you pull it out, and THEN you pay tax on the back-end. A lot of people think you get a tax break for putting it into a traditional retirement plan, but you don’t. It’s really a tax deferment, you're just waiting to pay taxes until later. But what is a Roth IRA? It’s an IRA where you’re putting money in and you don’t get an upfront break, so there’s no tax reduction. It’s not lowering your income, you’re putting that money in after you’ve already paid tax. Why would you want to do that? Well, you still get the tax deferral, but the key benefit of a Roth IRA is that when you pull money out on the back-end in retirement, the money you’ve paid plus all of the growth is completely tax-free. So let’s say you pay $6,000 and it grows to $20,000 over years, you could pull the whole $20,000 out in retirement without paying any taxes at all. That’s one of the major benefits to doing a Roth IRA. It’s tax-free money on the back end. What makes a Roth IRA attractive? If we think about right now, the government is spending trillions of dollars on COVID, bailing out companies and creating all these stimulus checks. All that money has to come from somewhere. Where is it gonna come from? A lot of people are concerned that the government’s going to raise taxes later to be able to pay for the spending today. So if you think taxes are going to get worse later, a Roth IRA might be a great vehicle for you to use. If you’re very good at saving, putting away a lot of money, chances are you’re not going to be in a lower tax bracket in retirement, because you’re going to have a good amount of income. You’re going to be able to maintain your standard of living throughout retirement, which means your tax bracket isn't going to get any lower later on. It’s going to stay at least the same, or maybe get worse, but wouldn’t it be nice to be able to pull money out in retirement tax-free? What is a backdoor Roth IRA, and who benefits from one? Not everybody qualifies for a Roth IRA. After all I’ve said, you might be sitting here thinking, “Wow Tony, I’m going to go out and open a Roth IRA tomorrow!” But, you might find out that you don’t qualify. Why would that happen? If you’re single and you make over $125,000 a year, or if you’re married and make over $198,000 a year as a couple, the Roth IRA gets phased out. What does that mean? Well the government says, “Hey, you make too much money to get this wonderful tax break, we’re not going to let you play along and participate.” At those levels they say you can do a small one, but if you make a little bit more than that, they just phase it out all together and say that no, you can’t do one at all. So the backdoor Roth IRA is a solution, it’s an answer for anyone who really wants to put money into a Roth IRA but finds out they’re not allowed to do so. What do you do? You can open a traditional IRA and then convert it over to a Roth, because there's no limit on how much money you can convert to a Roth IRA. That’s why we call it a backdoor. However, a couple of steps are required. First you have to open a traditional IRA, and then you’ve gotta convert that to a Roth IRA. Are there taxes going from traditional to Roth? Yes, but remember, this was supposed to be after tax money anyway. The big problem was that you didn’t qualify, and now we’re doing a workaround. The government said you couldn’t do it, but if you take these two steps, now you can...(read more)

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