The process of doing a Backdoor Roth IRA can be complicated. You also need to be aware of the pro-rata rule if you have a balance in your Traditional IRA. 🤳 Psy on TikTok, Facebook, Instagram 🤳 📖 Get Your Free Financial Spreadsheets and Resources 📖 ➡️ 👨🏫 Free Financial Coaching 👩🏫 Schedule a free 20-minute Individual Coaching Session Schedule a free 30-minute Couple's Coaching Session ➡️ 📧 Email: hello@firepsychat.com 📖 What’s on my display shelf? 📖 ➡️ For sponsorships and business inquiries ➡️ media@firepsychat.com 📷 Additional FIRE Videos Mentioned In this Video 📷 Our $3.7 Mil Fat FIRE Plan - How We're Saving 70% of Income (2023) - My $1.1 Mil Fat FIRE Progress (Sep 2022) - How to Become an Ordinary Millionaire - How to Start F.I.R.E - The Ultimate F.I.R.E Guide - How to Invest in an HSA - Become a TSP Millionaire - Financial Independence Calculator - ⏰ Table of Contents ⏰ 0:00 Backdoor Roth IRA Explained 7:44 Pro Rata Rule Explained #FIREPsyChat #FinancialIndependence #BackdoorRothIRA 🎵 Music and Sound Effects Provided by Epidemic Sound 🎵 Disclaimer: I am not a financial advisor. I am solely sharing my personal experience and opinions. All Strategies, tips, suggestions, and recommendations shared are solely for entertainment and educational purposes only. There are financial risks associated with investing. You must conduct your own research and due diligence, or seek the advice of a licensed advisor if necessary. Affiliate Disclosure: Some of the links on this webpage are affiliate links, meaning, at no additional cost to you, we may earn a commission if you click through and make a purchase and/or subscribe. However, this does not impact our opinions and comparisons....(read more)
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A Backdoor Roth IRA is a clever way to contribute to a Roth IRA if you’re exceeding the income limits for direct contributions or you exceed $6,000 in annual contributions. The Backdoor Roth IRA involves converting funds from a traditional IRA/most often a nondeductible IRA to a Roth IRA. This method can be beneficial for U.S. taxpayers to build their retirement savings with tax-free assets. In this article, we will discuss step-by-step instructions on how to Backdoor Roth IRA in 2023 and the Pro Rata rule explained in English. Step 1: Determine your eligibility Before proceeding with the Backdoor Roth IRA, you need to determine your eligibility. There are no income limitations when it comes to a traditional IRA – however, if you earn too much compensation, you may not qualify for a deduction. For 2022, the compensation limit is $76,000 for single filers and $125,000 for married couples filing jointly. Step 2: Open a Traditional IRA The next step is to open a Traditional IRA account at your preferred financial institution (broker). Most Institutions like Vanguard, Fidelity, Schwab, Charles offer IRAs. The key here is to select a Traditional IRA that allows for Non-deductible Contributions. It’s also important to make sure the account holder files taxes in the US since this is an IRS-regulated issue. Step 3: Contribute After-tax contributions If eligible, you can contribute up to $6,000 to the nondeductible traditional IRA. The limit is $7,000 for those over the age of 50. After-tax contributions are monies contributed from your earnings but not tax-deductible – you do not take any tax deductions. This is the reason behind the “After-tax” name. Step 4: Convert your Traditional IRA to a Roth IRA. The fourth step is to convert the after-tax contribution into Roth IRA. You do this by reaching out to the Traditional IRA company for the conversion process. There are no income limits for converting to Roth IRA so it’s accessible to all. The Pro Rata Rule Explained The Pro Rata rule only comes into play if the individual has pre-tax dollars in any other traditional IRA accounts as of December 31st in the same year as the conversion. It calculates the proportion of your pre-tax and after-tax dollars between all of your IRAs. The idea behind the Pro Rata rule is to avoid people contributing deductible funds to traditional IRAs on purpose to be converted to Roth to take advantage of no income limits. For example, an individual has $100,000 in traditional IRA, $10,000 of which is non-deductible post-tax money, the Pro Rata rule applies if he or she converts $6,000 from their non-deductible Traditional IRA to Roth IRA. Here’s how it works: 100,000 + 6,000 = 106,000 total balance before conversion 10,000 / 106,000 = 0.09 (9%) Non-deductible basis The conversion of $6,000 includes BOTH deductible and Non-deductible Dollars 6,000 x 9% = $540 is not taxed when converted 6,000 x 91% = $6,546 is taxable when converted. While the Pro Rata rule can create tax implications, it can be avoided by reducing the balance of pre-tax contributions in the traditional IRA before the end of the calendar year conversion. Conclusion The Backdoor Roth IRA is an effective way to contribute to a Roth IRA if you’re exceeding the income limits for direct contributions or you exceed $6,000 in annual contributions. Although the Pro Rata rule can create a tax impact, it’s essential to calculate it beforehand to avoid surprises come tax season. It’s always wise to seek financial advice from a professional if in doubt. https://inflationprotection.org/how-to-backdoor-roth-ira-step-by-step-in-2023-pro-rata-rule-explained/?feed_id=75783&_unique_id=64039fb0c93f3 #Inflation #Retirement #GoldIRA #Wealth #Investing #backdoorroth #backdoorrothfidelity #backdoorrothira #backdoorrothira2023 #backdoorrothiraconversion #backdoorrothiraexplained #backdoorrothirafidelity #backdoorrothirastepbystep #fatfireretirement #fidelitybackdoorrothira #fidelitybackdoorrothirasteps #fidelityrothconversion #fidelityrothiraconversion #financialindependenceretireearlymovement #howtoavoidproratarulebackdoorroth #rothiraproratarule #whatisabackdoorroth #BackdoorRothIRA #backdoorroth #backdoorrothfidelity #backdoorrothira #backdoorrothira2023 #backdoorrothiraconversion #backdoorrothiraexplained #backdoorrothirafidelity #backdoorrothirastepbystep #fatfireretirement #fidelitybackdoorrothira #fidelitybackdoorrothirasteps #fidelityrothconversion #fidelityrothiraconversion #financialindependenceretireearlymovement #howtoavoidproratarulebackdoorroth #rothiraproratarule #whatisabackdoorroth
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