What is a Backdoor Roth IRA? Is it true they are tax free? How do I rollover my IRA? Why do I want to do a Roth IRA Conversion? These are questions that you may have when you hear term Roth Rollover. Well today is your lucky day. Today were going to break down these questions and you will have a better understanding of a Roth IRA Rollover to see if it fits for your financial goals.
What is a Backdoor IRA?
The term “Rollover” is a way to transfer Funds from a Traditional IRA to a Roth IRA. A Roth IRA is funded with after tax dollars. Meaning the funds contributed to the account have already been subject to tax before they were contributed to the account. This is just the opposite for Traditional IRA’s. Traditional IRA’s are funded with pretax dollars. Meaning Traditional IRA’s grow tax deferred.
Is it true Roth IRA’s are tax free?
A Roth IRA is funded with after tax dollars. These funds and gains can grow tax free in a Roth IRA and are not subject to tax upon withdraw. A Traditional IRA uses pretax dollars meaning the contributed funds and gains are subject to ordinary tax upon withdraw. When you do a Backdoor rollover you are taking your Traditional IRA funds and converting them into a Roth IRA. This process will require you to pay taxes on the Traditional IRA contributions and gains before the conversion. Once the funds have been taxed they are able to be transferred into the Roth IRA, and grow tax free.
How do I rollover my IRA?
The process of converting over your Traditional IRA into a Roth IRA can be done two different ways, indirect and direct. However only have 60 days to complete the process or else the withdraw will be considered a distribution and be subject to taxation.
Direct Rollover
A direct rollover is much simpler and faster. This method requires the funds to be directly transferred electronically. Meaning once the funds have been taxed from the Traditional IRA they are all ready to be converted to the Roth IRA. This process is the preferred method because it quicker and more efficient. Get in touch with your financial advisor to help assist you with a rollover. They can make this process smooth and easy.
Why do I want to do a Backdoor Rollover?
A good reason you may decide to do a rollover is because the markets are down, thus your overall account balance is much lower. This is a good opportunity for you to rollover into a Roth IRA because you will be taxed less due to the lower account value. The funds once rolled over can now grow at a tax free rate on both the basis and the earnings.
The second reason for a rollover would be if you expect to be in a higher tax bracket upon retirement. Individuals who end up in a higher tax bracket when they retire may find this a great way to earn tax free withdraws. Since Roth IRA’s are not taxed upon distribution this would be a good reason to do a Roth IRA Rollover because you will not be subject to pay higher taxes as you would if you had a Traditional IRA.
Another reason an individual may want to do a Roth conversion is because their current income is too high. Roth IRA’s have a phase out range meaning when an individual makes over a certain amount of money they can no longer contribute to a Roth IRA. The way that these individuals may get around this rule is by contributing to their traditional IRA first. Once contributions have been made the individual may roll over that entire amount into a Roth account. By dong this, the individual can now participate in a Roth IRA’s tax free growth.
Lastly
Always consult your financial adviser before conducting a backdoor roll over. They can help assist you and guide you through the process from beginning to end.
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