As we have discussed in previous blogs, the main advantage of a Roth IRA is that it can provide tax-free money in retirement. You put money away, and it grows tax-deferred so you can use it tax-free in retirement.
The main drawback or disadvantage is the income limitation. If you make too much money, you can't contribute to a Roth IRA account. In 2021, for individuals is $140,000 a year, and for a married couple, the limit is $208,000 a year.
You can still put money away for retirement with a traditional IRA if you're covered by a plan at work. However, there is also an income phase-out to be able to deduct that traditional contribution. That limit is $125,000 a year.
Overall, if you are a high-income earner and you're covered by a work plan, but you want to put more money away into a retirement vehicle, your options start disappearing at a rapid pace. A potential solution could be a backdoor Roth conversion.
What is a Backdoor Roth Conversion?
A backdoor Roth conversion is essentially making a nondeductible traditional IRA contribution. You save in a traditional IRA and then transfer that money into a Roth account down the road. If you do it right, you're able to do that without paying a lot of the tax that you would normally pay during a Roth conversion transfer from traditional to Roth because you didn't deduct that in the first place.
We always recommend talking with your financial advisor or accountant before you moved forward with this type of savings plan.
Learn More About Roth IRAs
If you are looking for the best retirement planning strategy and are interested in learning more about Roth IRAs, Roth conversions, or have any questions, please contact our team today!