Money with Michelle: Navigating Backdoor Roth IRAs

A Roth IRA is a retirement account that can grow tax free, but not everyone can contribute to these based on income. While this kind of account is taxed, the answer might be a Backdoor Roth IRA.

“If a single person has earned income of $153,000 or more a married couple has income of $228,000 they cannot contribute to a Roth IRA. A Backdoor Roth is the method or technique for those higher income earners to get money into a Roth IRA.”

Here’s what you need to do: “You need to have a traditional IRA and Roth IRA account open. You make a non-deductible contribution to the IRA, wait a couple days for the cash to settle, and then you do conversion over to the Roth.”

The conversion does trigger a taxable event. But there are limitations on those conversion: “This year it’s $6,500, but for those of us over the age of 50, it’s $7,500.”

If you have not filed your taxes for last year, you can still make a contribution for 2022. The limits are $6,000 or $7,000 for those over 50 because those are last year’s numbers.

Michelle tells us to be aware of the 5 year rule: “You need have money in a Roth IRA for at least 5 years before you take a distribution. If you don’t, you’ll end up paying tax on it and a 10% penalty.”