Weekend Reading: Backdoor Roths Are Powerful – If Done Right
This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Minimizing the money you owe Uncle Sam should always be one of the core focuses of your retirement plan. While a Roth account is a powerful tool you can leverage to generate tax-free income, it has limitations on funding and participation. As such, this is where a loophole can come into play: The backdoor Roth strategy.
READ THE ARTICLEHow it works: A backdoor Roth allows those who exceed the Roth IRA limits to make an after-tax contribution to a traditional IRA, then convert those funds to a Roth IRA. Implementing the backdoor Roth correctly, however, requires careful attention and understanding of its potential value, as well as the associated tax reporting burden.
Consider the complexities: If leveraging the backdoor Roth strategy, correctly reporting it on tax returns is key, and will most often require the assistance of a financial professional. You must provide all necessary information for reporting, meet reporting deadlines for contributions, distributions, and conversions, plus track basis (after-tax contributions) and properly fill out your IRS Form 8606.
You may be able to get into a Roth with high income, but that doesn’t mean it’s worth your time. Much like the conversation of about “finding your minimum," it’s important to weigh the potential gains with the complexities that can arise with this strategy.