Backdoor Roth IRA

Roth options are a great option when you're thinking about building your nest egg.

Roth IRAs have one of the best benefits. They allow qualified investors to withdraw their retirement funds tax-free. People with high incomes can avoid the Roth income limit by setting up a Backdoor Roth IRA.

What is a Backdoor Roth?

The Backdoor Roth IRA allows you to convert your nondeductible traditional IRA contributions to a Roth IRA even if your income is not sufficient to make a Roth IRA donation. The Backdoor Roth Conversion is not subject to tax if it is done correctly.

What is a Backdoor Roth IRA?

First, you must make a non-deductible contribution to a traditional IRA in order to convert your Backdoor Roth IRA. The traditional IRA does not have an income ceiling, unlike a Roth IRA.

You will then convert the nondeductible IRA contributions to your Roth IRA. The conversion will not be taxed if there are no earnings from the funds converted. This is unlike converting pretax IRA funds to a Roth. In that case, you would pay taxes at your current income rate on the converted amount.

Your Modified adjusted gross income (MAGI) and tax filing status (single, married filing jointly or married filing separately) are important factors to consider. This will help you determine if your eligibility to contribute to a Roth IRA.

  • For tax year 2022, your MAGI (measured as a single individual) must be less than $140,000 to contribute to a Roth IRA. You can only contribute fully if you have a income below $125,000 Individuals with incomes between $125,000 and $140,000 may contribute incrementally less if their income rises.
  • For tax year 2022, your MAGI must not exceed $208,000 if you are married filing jointly. You can only contribute fully if your combined income falls below $198,000. Individuals with income between $198,000 and $208,000 have incrementally lower contribution thresholds.

You may be eligible to convert a Backdoor Roth if your MAGI is higher than the limit based on your tax filing status.

Four Easy Steps to Implement a Backdoor Roth IRA by 2022

These are the steps to perform a Backdoor Roth Conversion:

1. Contribute to an existing traditional IRA, or open and fund a traditional IRA.

An IRA can be opened at any financial institution, online or brick-and-mortar. You can contribute as much as $6,000 to a traditional IRA in 2022, or $7,000 if your age is 50 and over.

2. Learn how a Roth IRA conversion works.

For help, it might be a good idea to contact a financial advisor. Before you execute a Backdoor Roth Conversion, consult with a tax professional and your advisor.

3. Convert your contributions into a Roth IRA.

While the principal will not be taxable, earnings from a Roth IRA conversion will. To minimize the taxable earnings, it is a good idea to convert as soon as possible. If your employer offers a Roth401k, you have the option to roll over funds to it if you wish.

4. These steps should be repeated annually.

This strategy can be used for as long as it is appropriate for your financial situation.

The Key Considerations of a Backdoor Roth IRA

Before you open a Backdoor Roth IRA, here are some things you should consider.

  • Are Backdoor Roth IRAs permitted in 2022? The Build Back Better Act would have stopped Backdoor Roth IRAs from being opened in 2022. Despite this legislation being on the back burner, the strategy is still alive and well, at the very least for the moment.

  • The tax implications of a Backdoor Roth IRA

    You might need to pay taxes in certain situations with a Backdoor Roth IRA such as:
    • You should have included pre-tax IRA assets when you converted. Taxes will be charged on pre-tax assets if you make traditional IRA contributions. You will need to pay income tax when you file your tax return.
    • You may have any pre-tax IRA assets that you still have after the Backdoor Conversion. This is the Pro Rata Rule.
  • The Pro Rata Rule This is one of the most important rules for Backdoor Roth Conversion. This IRS rule determines the amount that is subject to tax when an IRA dollar is converted from a traditional IRA into a Roth IRA. Simply put, if you try to convert traditional IRA contributions after-tax to a Roth IRA but have existing pre-tax IRA funds, you will be subjected to taxation on a prorated base.

The IRS will look at all your IRA accounts when determining your tax bill for a conversion from a conventional IRA to a Roth IRA. If your IRAs are made up of 80% before-tax money and 20% of after-tax funds, the 80/20 ratio will determine how much of the after-tax money is going to be taxable when you convert to a Roth.

This is the case where you will have to pay taxes on 80% of the Roth amount, regardless of how much money you convert, or from which pretax IRA account. The IRS applies the Pro Rata Rule at year-end to your total IRA balance, not at conversion.

  • The Five Year Rule:This rule requires a five year waiting period before earnings and converted IRA funds can be withdrawn. You must be at least 59 1/2 and have had the Roth IRA for at least five years to withdraw your earnings. You may be subject to taxes if funds are withdrawn before the due date. If you are over 59 1/2, you could face a 10% penalty.

  • Transfers with Backdoor Roth IRAs

    Remember that the conversion must fall within one of these options:
    • A rollover is where funds are transferred from your IRA to the Roth account. The money is deposited into the Roth account within 60 day.
    • A trustee-totrustee transfer is where the IRA provider transfers your funds directly to Roth IRA providers;
    • A "same trustee" transfer is where both the Roth IRA and the traditional IRA are transferred to the same financial institution.

Is a Backdoor Roth IRA worth it?

Depending on many factors, the Backdoor Roth IRA limits might not be suitable for everyone. Take, for example:

  • If you can meet your retirement savings goals using your employer retirement account, and don't anticipate needing additional savings for retirement, a Backdoor Roth IRA may not be necessary.
  • Because of the pro-rata rule it might not be advantageous to convert if you have any pre-tax money in a traditional IRA.
  • It is worth noting that inherited IRAs do not count in the pro-rata calculation.
  • The Roth IRA should be kept for at least five more years before you can withdraw the money.
  • If you're in a high tax bracket right now, and plan to retire in a lower tax bracket, it may be a good idea to keep your money in the traditional IRA.
  • If you are planning to move to a less income tax state, or to a state without income taxes.

A Backdoor Roth conversion, on the other hand can be worth considering if:

  • You have exhausted all other retirement savings options.
  • You have a high income earner.
  • You are willing to keep the Roth money for at least five years, preferably longer.
  • Other Roth assets are not available to you.

Here are some next steps for you

  • One of our fiduciary advisors can provide tailored advice about investing for your financial goals.
  • Get the 65 Ways To Retire Smart free guide, which features top insight from our financial advisors.
  • Register for Personal Capital's financial tools and get a complete 360-degree overview of your personal finances.

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Frequently Asked Questions

What is the best precious-metal to invest?

Answering this question will depend on your willingness to take some risk and the return you seek. While gold is considered a safe investment option, it can also be a risky choice. For example, if you need a quick profit, gold may not be for you. If you have time and patience, you should consider investing in silver instead.

If you don't care about getting rich quickly, gold is probably the way to go. Silver might be a better investment option if steady returns are desired over a long period of time.

What proportion of your portfolio should you have in precious metals

First, let's define precious metals to answer the question. Precious metals have elements with an extremely high worth relative to other commodity. They are therefore very attractive for investment and trading. Today, gold is the most commonly traded precious metal.

There are many other precious metals, such as silver and platinum. The price volatility of gold can be unpredictable, but it is generally stable during periods of economic turmoil. It is also not affected by inflation and depression.

The general trend is for precious metals to increase in price with the overall market. However, they may not always move in synchrony with each other. For example, when the economy is doing poorly, the price of gold typically rises while the prices of other precious metals tend to fall. Investors expect lower interest rates which makes bonds less appealing investments.

When the economy is healthy, however, the opposite effect occurs. Investors favor safe assets like Treasury Bonds, and less precious metals. Since these are scarce, they become more expensive and decrease in value.

To maximize your profits when investing in precious metals, diversify across different precious metals. Additionally, since the prices of precious metals tend to rise and fall together, it's best to invest in several different types of precious metals rather than just focusing on one type.

What are the benefits of a gold IRA

A gold IRA has many benefits. You can diversify your portfolio with this investment vehicle. You can control how much money is deposited into each account as well as when it's withdrawn.

You also have the option to roll over funds from other retirement accounts into a gold IRA. This makes for an easy transition if you decide to retire early.

The best part? You don’t need to have any special skills to invest into gold IRAs. They're available at most banks and brokerage firms. Withdrawals are made automatically without having to worry about fees or penalties.

But there are downsides. Gold is known for being volatile in the past. Understanding why you want to invest in gold is essential. Are you looking for growth or safety? Are you trying to find safety or growth? Only then will you be able make informed decisions.

If you plan to keep your gold IRA indefinitely, you'll probably want to consider buying more than one ounce of gold. One ounce doesn't suffice to cover all your needs. You may need several ounces, depending on what you intend to do with your precious gold.

A small amount is sufficient if you plan to sell your gold. Even a single ounce can suffice. But you won't be able to buy anything else with those funds.

How is gold taxed in Roth IRA?

Investment accounts are subject to tax based only on their current value and not the amount you originally paid. If you invest $1,000 in mutual funds or stocks and then later sell them, all gains are subjected to taxes.

However, if the money is deposited into a traditional IRA/401(k), the tax on the withdrawal of the money is not applicable. You pay taxes only on earnings from dividends and capital gains — which apply only to investments held longer than one year.

The rules governing these accounts vary by state. In Maryland, for example, withdrawals must be made within 60 days of reaching the age of 59 1/2 in order to qualify. Massachusetts allows you up to April 1st. New York allows you to wait until age 70 1/2. To avoid penalty fees, it is important to plan and take distributions in time to pay all your retirement savings.

What Does Gold Do as an Investment Option?

The price of gold fluctuates based on supply and demand. Interest rates can also affect the gold price.

Due to their limited supply, gold prices fluctuate. You must also store physical gold somewhere to avoid the risk of it becoming stale.

How much should your IRA include precious metals

The most important thing you should know when investing in precious metals is that they are not just for wealthy people. They don't require you to be wealthy to invest in them. In fact, there are many ways to make money from gold and silver investments without spending much money.

You may consider buying physical coins such as bullion bars or rounds. You could also buy shares in companies that produce precious metals. You might also want to use an IRA rollover program offered through your retirement plan provider.

You'll still get the benefit of precious metals no matter which country you live in. Even though they aren't stocks, they still offer the possibility of long-term growth.

Their prices are more volatile than traditional investments. You'll probably make more money if your investment is sold down the line than traditional investments.


  • Instead, the economy improved, stocks rebounded, and gold plunged, losing 28 percent of its value in 2013. (
  • Indeed, several financial advisers interviewed for this article suggest you invest 5 to 15 percent of your portfolio in gold, just in case. (
  • This is a 15% margin that has shown no stable direction of growth but fluctuates seemingly at random. (
  • If you take distributions before hitting 59.5, you'll owe a 10% penalty on the amount withdrawn. (
  • If you accidentally make an improper transaction, the IRS will disallow it and count it as a withdrawal, so you would owe income tax on the item's value and, if you are younger than 59 ½, an additional 10% early withdrawal penalty. (

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Investing in gold vs. investing in stocks

These days, it might seem quite risky to invest your money in gold. The reason behind this is that many people believe that gold is no longer profitable to invest in. This belief comes from the fact most people see gold prices falling due to the global economy. They fear that investing in gold will result in a loss of money. In reality, however, there are still significant benefits that you can get when investing in gold. Below we'll look at some of them.

One of the oldest currencies known to man is gold. Its use can be traced back to thousands of years ago. People around the world have used it as a store of value. It's still used by countries like South Africa as a method of payment.

You must first decide how much you are willing and able to pay per gram to decide whether or not gold should be your investment. You must determine how much gold bullion you can afford per gram before you consider buying it. If you don’t know what the current market price is, you can always call a local jewelry store and ask them their opinion.

Noting that gold prices have fallen in recent years, it is worth noting that the cost to produce gold has gone up. Although the price of gold has dropped, production costs have not.

When deciding whether to buy gold, another thing to consider is how much gold you intend on buying. If you plan to buy enough gold to cover your wedding rings then it is probably a good idea to wait before buying any more. But, if your goal is to make long-term investments in gold, this might be worth considering. Selling your gold at a higher value than what you bought can help you make money.

We hope you have gained a better understanding about gold as an investment tool. It is important to research all options before you make any decision. Only then can informed decisions be made.

By: Debbie Macey
Title: Backdoor Roth IRA
Sourced From:
Published Date: Thu, 22 Sep 2022 20:00:37 +0000

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