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Back-Door Roth Conversions May Be Your Best Option

By on September 10, 2018
Categories: RETIREMENT

For most Americans, the Roth Individual Retirement Account is an excellent way to save for retirement.

Once the money is deposited into a Roth IRA, it can potentially grow tax-free for many decades. And when retirees eventually tap into these accounts, they won’t owe tax on the withdrawals.

Investors enjoy these significant tax perks because the initial contributions into a Roth are done with after-tax money.

While the Roth is an extremely attractive vehicle to save long term for retirement, not everyone is allowed to set aside retirement money this way.  There is an income cap that prevents more affluent investors from participating.

A Back-Door Strategy

There is a way, however, for wealthier people to circumvent this Roth restriction. For years, high-income investors have contributed to traditional IRAs, which have no income limits, and have ultimately converted money from these accounts into Roths.

While this back-door strategy has made some financial advisors nervous, the Internal Revenue Service recently confirmed that it is acceptable. In a recent IRS webinar for tax professionals, an IRS tax law specialist confirmed that this approach is legitimate.

Depending on your income, you may not need to worry about carrying out a Roth conversion. Here is the current breakdown of the modified adjusted income that you can’t exceed to either make a full or partial contribution to a Roth.

 

Roth Deductions 2018

 

Here are the main reasons that you might want to convert a traditional IRA into a Roth:

  1. You will not owe taxes on the withdrawals you make from a Roth in retirement.
  2. If you don’t want to take withdrawals from your Roth during retirement, you won’t have to. In contrast, traditional IRAs do have required minimum distributions.
  3. Loved ones who inherit a Roth IRA will have to take required minimum distributions, but they won’t pay taxes on the withdrawals.

If you are considering a Roth conversion, you should consult your tax and/or financial advisor about your options.

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