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Back-Door Roth IRA: Definition and Explained


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A Back-Door Roth IRA is a tax-advantaged investment account that allows individuals to contribute funds to a Roth IRA, even if their income exceeds the limits set by the IRS. This type of account offers several benefits, including tax-free growth and tax-free withdrawals during retirement. To understand how a Back-Door Roth IRA works, it's important to first understand traditional Roth IRAs. A Roth IRA is a retirement account that allows individuals to contribute funds on an after-tax basis. The account grows tax-free, and withdrawals made during retirement are also tax-free. However, there are income limits for contributing to a Roth IRA. For 2021, individuals with a modified adjusted gross income (MAGI) of up to $140,000 can contribute up to the maximum annual limit of $6,000 to a Roth IRA. For those with a MAGI between $140,000 and $155,000, the contribution limit is gradually reduced. Individuals with a MAGI above $155,000 are not eligible to contribute to a Roth IRA. This is where a Back-Door Roth IRA comes in. Essentially, a Back-Door Roth IRA is a way for individuals with higher incomes to contribute to a Roth IRA by utilizing a two-step process. Step one involves making a nondeductible contribution to a traditional IRA. This contribution is not tax-deductible, as it would be with a traditional IRA. Individuals can contribute up to the maximum annual limit of $6,000 to a traditional IRA for 2021, regardless of their income. Step two involves converting the traditional IRA to a Roth IRA. This conversion can be done at any time, but it's important to note that individuals will owe taxes on any earnings that have accrued in the traditional IRA. This is because the conversion is considered a taxable event. Overall, a Back-Door Roth IRA can be a useful tool for individuals who want to contribute to a Roth IRA but have income limits. However, it's important to consult with a financial advisor or tax professional to ensure that this strategy is appropriate and aligned with individual financial goals. https://inflationprotection.org/back-door-roth-ira-definition-and-explained/?feed_id=91946&_unique_id=644a794ed5b94 #Inflation #Retirement #GoldIRA #Wealth #Investing #KeatingAssociates #RaymondJames #Retirement #savings #TheConverseTeam #BackdoorRothIRA #KeatingAssociates #RaymondJames #Retirement #savings #TheConverseTeam
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