View Full Version : Finance: Backdoor Roth!

January 8, 2018, 03:54 AM
this will be my series of threads time to time on at most income level to be a better saver and better prepared for future.

A portfolio needs to be diversified. This diversification is not only among stocks you hold but among investments that you have. Meaning at some point later in your life you should have money in tax deferred account (ie 401k), tax exempt account (roth ira), pension (if available), real estate. These are MUST for everyone at most income level.

Roth IRA is a post tax investment where any gain can be drawn tax free at retirement. Young ppl are always encouraged to contribute to roth as early as possible. Maybe you can look into buying cryptocurrencies in your roth and all the gain would be TAX FREE!!! you can buy whatever the hell you want in it....

Now the limits:

amount: 5500 USD per year you can contribute.
income: you can not contribute if you are single and make >135k usd, or if you are married and make >199k USD.

This income limitation prevents many single or certianly a lot of dual income couple to miss out on this great tax free wealth creation.

Loophole: Back door ROTH if you fall into those income level

How to do it:

1. contribute 5500 USD to traditional IRA (at that income level these are nondeductible contributions meaning post tax)
2. Convert that tradional IRA to Roth IRA (there are no tax implication because your money is already post tax)
3. invest
4. Repeat every year.

5500 usd may seem like nothing but trust me over time with the right investment it will be significant tax free money later in life.

Things to keep in mind:
When you do this conversion, you can not have any PRE-TAX money in any of your ira (tradional ira, sep ira, etc). So if you have any pretax ira account you need to either convert them to roth and take a tax hit or preferably roll them over to any 401k/b that you have.

if anyone interested in the process I can further provide step by step guidance.

until my next thread...