The terminology may seem a bit underhanded, but this is a way for taxpayers to put money into a Roth IRA who may not otherwise do so, and yes, it is 100% legal. Hello again, Lynn Spencer here. Today I wanted to share how Backdoor Roth IRA contributions are becoming a popular financial tool to save more money towards your retirement.
If your Modified Adjusted Gross Income (MAGI) exceeds $135,000 (single) and $199,000 (married filing joint) or you are a widow(er) for 2018, you are NOT permitted to contribute to a Roth IRA - unless it's through the Backdoor. Just so we are clear on a few important points, a Roth IRA is a retirement savings plan where "after tax" contributions are made, assets grow tax free, and then upon your retirement, distributions are also tax free. In addition, distributions are not subject to RMD's or Required Minimum Distributions. Stop for a moment and think how valuable an investment could become in your lifetime if you never again had to pay taxes. This is a big reason why Roth IRA's have become so popular, and you can pass them down to a future generation (but they must begin taking RMD's by Dec 31st of the year following your death).
The way a Backdoor contribution works is that you and or your spouse contribute $5,500 each on an AFTER-TAX basis to an IRA ($6,500 each if you are age 50 or over). You must then wait a couple of days and then roll over the money to your Roth IRA. If your MAGI income exceeds the amount stated above, the only way to roll over to a Backdoor Roth IRA is if you are a participant in an Employer sponsored retirement plan such as a 401(k) or 403(b).
At Killingsworth Spencer we help our clients understand the complex and often misunderstood nuances of the tax code to help improve their lives. We work in concert with your financial advisor to help you get the most out of what you work so hard to accomplish. When you need to understand complex tax ideas, be sure to give us a call.