By Andy Badertscher

The backdoor Roth IRA is a valuable strategy to start to understand and utilize if these circumstances align with your financial needs.

Here are the key points to understand about the backdoor Roth IRA:

Income Limits: If your income exceeds the IRS-imposed limits for Roth IRA contributions ($144,000 for single filers and $214,000 for married individuals filing jointly), you may find yourself unable to contribute directly to a Roth IRA.

Backdoor Roth IRA: The backdoor Roth IRA is a conversion maneuver that allows individuals with high incomes to fund a Roth IRA despite these income limits.

Step-by-Step Guide: Here's how it works:

1. Contribute to Traditional IRA: Start by contributing money to your traditional IRA account.
2. Convert to a Roth IRA: Next, convert your contribution from your traditional IRA to a Roth IRA.
3. Tax Implications: Be prepared to pay taxes on the converted amount. Since Roth IRAs are funded with post-tax dollars, you'll need to forfeit any tax deduction you received for your traditional IRA contribution. Additionally, if your traditional IRA has accrued investment gains, you'll owe taxes on those gains as well.

Pro-Rata Rule: It's crucial to understand the IRS's pro-rata rule. This rule requires that rollovers from traditional IRAs to Roths be done pro rata, meaning the tax implications are based on the proportion of pre-tax and after-tax money in all your traditional IRA accounts combined.

Seeking Guidance: Planning for a backdoor Roth contribution requires careful consideration and compliance with IRS rules. Our advisors at the Hummel Group are here to help you evaluate if this strategy is suitable for your financial situation and guide you through the execution process.

Taking advantage of the backdoor Roth IRA strategy can provide high-income individuals with an opportunity to benefit from the advantages of a Roth IRA, even if they exceed the income limits. Don't hesitate to reach out to us for personalized assistance with implementing this strategy in your life effectively.