Retirement Super Savers: Back Door RothsSubmitted by Financial Planning Solutions, LLC on January 25th, 2018
Are you a Retirement Super Saver?
Nowadays many people are behind in setting aside money for retirement. A number of recent studies have shown that Americans are sorely behind in saving for retirement.
But that does not have to be you!
If you are already maxing out contributions to your 401(k) or 403(b) at work, terrific! But doing so is not a “one-and-done” transaction. 401(k)s were never designed as the primary retirement savings vehicle. They were first used by bankers as a supplemental retirement plan. Later, they became popular replacements for pension plans.
Today we know that if you want a secure retirement, you are the one that has to do something about it.
One of our favorite ways to supersize your retirement contributions is to also set up a non-deductible Traditional IRA. Even if you participate in a qualified retirement plan at work (which usually limits your ability to deduct IRA contributions), you can still contribute to a Traditional IRA. The difference is that your contributions will not be tax-deductible. To us, that does not matter.
The key to a happy and confident retirement is to save aggressively, especially if you are behind.
A non-deductible IRA is tax-deferred and it can be converted to a Roth IRA. Funding a Roth this way is called a “back-door” Roth.
Because the non-deductible IRA has been funded with after-tax contributions, most of the potential conversion amount is non-taxable; you only have to pay taxes on the IRA earnings.
So, if you contribute $6,500 in 2018 to a non-deductible IRA, you can then take those contributions and convert them to a Roth IRA immediately.
Why convert to a Roth? Because qualified distributions from a Roth are never taxed and an immediate conversion costs you virtually nothing.
Now, converting or funding a Roth is not for everyone and special rules may apply. In addition, your current and expected tax bracket are important considerations. Also, your age, other assets and overall financial situation have a bearing, too.
Still wondering if a Back Door Roth is for you? Give us a call. We’re here to help.
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.