The "Other" ROTH IRA

Recently, there has been a lot of buzz about the "backdoor Roth IRA," and for good reason.

If you're not familiar with this strategy, it involves taking advantage of a loophole in the tax code to contribute to a Roth IRA without paying taxes on the money you're putting into it.

What is a backdoor Roth IRA?

A backdoor Roth IRA is an account that allows you to make investments with tax-free growth and tax-free withdrawals. You can set up a traditional IRA, then convert it into a Roth IRA, avoiding the 10% early withdrawal penalty.

A backdoor Roth IRA allows you to contribute money to a traditional IRA—which means saving on taxes now—and then converting the account into a Roth IRA—which means saving on taxes later. It’s called the “backdoor” because it involves using other accounts that have already been taxed (like your 401(k)) rather than paying tax upfront like with a regular Roth IRA contribution.

How do I complete a backdoor Roth IRA in 2022?

To complete the backdoor Roth IRA, you need to have earned income from employment or self-employment (or spousal income), but not too much earned income. If you have too much earned income, you can't contribute to a Traditional or Roth IRA for the year; if your spouse has too much earned income, he or she can't contribute to an IRA for the year either. If neither of these apply to you (or your spouse), then all you have to do is contribute as much as possible between April 15th and December 31st!

Please consult your local tax professional for additional help. Conversions can be done on your own but having a qualified professional by your side will make the process run smoother and take less time.

Benefits of a backdoor Roth IRA:

Tax-free growth: When money grows in a traditional IRA or 401k account, it's taxed when withdrawn at retirement age. But when money grows in a Roth account? It grows tax free! That means more cash in your pocket when it comes time to withdraw funds.

If you plan to have earned income when you retire or if you want to minimize your future taxable income I would seriously consider a backdoor ROTH IRA conversion.