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Roth IRA contributions are limited in eligibility based on your filing status and corresponding income. As a result, many folks don't believe they're allowed to contribute to Roth accounts. But there's a way around this limitation.....
For 2019, if you file married joint or your modified adjusted gross income is above $203,000 you're not eligible to contribute to a Roth IRA. There are limitations and contribution reductions for different filing statuses and income levels.
The "Backdoor" Roth IRA is a technique used to work around these income limitations rules for Roth IRA contributions.
So for those who earn enough money that they're not eligible to make a Roth IRA contribution, there's a "backdoor" way to still contribute money into a Roth IRA.
Here's the step-by-step process for this technique:
Below are examples of Backdoor techniques in two different scenarios.
Example #1: Conversion with NO pre-existing Traditional IRA Accounts:
Example #2: Conversion WITH pre-existing Traditional IRA Accounts:
So you can see that this technique is much more beneficial when conducted by those who don't have existing Traditional IRA accounts in place, as the taxability of the conversion to the Roth account is calculated using a prorated percentage of non-deductible vs deductible IRA funds.
However, there's also a way around this existing IRA limitation, which we'll illuminate in our next E-Newsletter...stay tuned!!
Also, remember that the total of all 2019 Roth & Traditional IRA Contributions cannot exceed $6,000 ($7,000 if age 50 or older), and must be less than your taxable compensation for the year.
Contact us if you have any questions on how this "Backdoor" technique can be used for you!