Diversify Your Retirement with a Backdoor Roth IRA

Retirement is something that everyone should start thinking about once they begin their careers. Unfortunately, saving for retirement is a topic that commonly only becomes a worry as we get closer to retirement. For many families, expenses continue to grow as children are born and raised and as a result, retirement planning does not become a top priority until later in life.

If you are interested in having the options of both tax-deferred and non-taxable retirement options, it may be beneficial to utilize a Roth IRA. Unlike a traditional IRA or 401(k) tax-deferred retirement accounts (which are contributions to a retirement plan made with before tax income and then taxed on the distribution), a Roth IRA allows an individual to invest retirement savings and pay the tax on their income upfront. After the initial contribution, all growth and withdrawals are tax-free.

Unfortunately, many individuals are not allowed to open Roth IRAs because they make too much money under the traditional rules.  The current IRS income limits for 2016 only allow anyone with adjusted gross income below $132,000 (single) and $194,000 (married filing jointly) to contribute to a Roth IRA.

However, with a backdoor Roth IRA, the rules are different.  Anybody can contribute regardless of income.  Further, if an individual begins to contribute to a Roth IRA in their 20's, by the time they are nearing retirement age that investment will have grown into a substantial tax free asset. IRA and Roth IRA contributions for 2016 can be made up until April 15, 2017.

Distributions from Roth IRAs are also more flexible than traditional IRAs.  You may begin to withdraw your earnings from a Roth IRA at the age 59 1/2 as long as the Roth IRA has been in existence for 5 years.  The contributions to a Roth IRA may be taken out at any time without penalty. This is a benefit for individuals who may need emergency funds without suffering any tax or penalties upon withdrawal.  Further, unlike IRAs and 401(k)s that have Required Minimum Distribution (RMD) upon the age of 70 1/2, Roth IRAs do not have a RMD.  Therefore you can withdraw funds at your discretion.  

Here are the basics of how you proceed with a backdoor Roth IRA:

You contribute to a traditional IRA. It is easiest to go about a backdoor Roth IRA if you do not already have a traditional IRA. First, work with an IRA provider and make a traditional IRA contribution up to the yearly limit ($5,500 in 2016 and 2017, $6,500 for individuals over the age of 50).

Convert the account to a Roth IRA. Next, working with your IRA administrator, once you have contributed to a traditional IRA, convert those funds to a Roth IRA. It is important to do this conversion as quickly as possible to avoid any increase or decrease in the investment.

If you have an existing traditional IRA.  If you already have a traditional IRA that has been invested for some time, the conversion to a Roth IRA is more complex and requires pro rata conversion of the gains along with the contribution.  If you already have a traditional IRA, work with your investment adviser and tax adviser to determine the possible tax consequences.

By utilizing Roth IRAs, you can diversify your retirement investments and insure tax free growth which can be very beneficial in retirement.

If you have any questions about tax and estate planning, please feel free to contact Glick and Trostin, LLC at 312-346-8258.

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