Become a better investor
Lesson in Course: Work in progress (beginner, 4min )
Due to the income limits for Roth IRAs, we may not be able to contribute anymore if we get our big promotion. Luckily, there is a way for us to sneak contributions to our Roth IRA through a backdoor regardless of how much we make. The IRS limitation is on direct contributions but there aren’t any restrictions on conversions and we’re allowed to make one Roth IRA conversion each year.
To set up our backdoor, we need to contribute to our Traditional IRA first. We can then convert the contribution, or the whole Traditional IRA, into a Roth IRA. We could also backdoor our after-tax contributions from a 401(k).
Using the backdoor will create taxes owed on the amount converted in addition to any earnings that have accumulated in the Traditional account.
How to pull off the backdoor roth:
If we are high-income earners, consider using the backdoor strategy to fund your Roth account but make sure to consult a tax advisor or the Archimedes team so that we can avoid pitfalls and tax penalties!