One of the most important decisions anyone has to make in achieving their financial goals is how to invest their money. This might sound like something you can decide in just a few minutes, but let this be a reminder that any decision now can have long-standing consequences, so you have to decide carefully what your first or next move is going to be.
For one Redditor posting in r/personalfinance, there is a big question about how to navigate the backdoor Roth and IRA space, especially for someone with a slightly higher income. This backdoor Roth topic is an area where Reddit specializes in responses, so there is no question that this individual is going to get a few different answers.
Why Should You Do a Backdoor Roth?
In this Redditor’s case, they are understandably confused, which is fair, because the notion of a backdoor Roth might only be familiar to those who have really done their research.
As a result, this individual understands that the purpose of this backdoor method is to get around the $0 Roth IRA contribution limit for high earners. This allows you to convert a traditional IRA into a Roth IRA, but they are taking this one step further and believe that it’s better to use the traditional IRA if you earn more.
All of this is coming to a head because the Redditor believes that these two ideas cannot live together and are somewhat contradictory. In other words, if you make so much that you cannot contribute to a Roth IRA, why would you turn a traditional IRA into a Roth IRA if the traditional route tends to earn more?
Ultimately, this Redditor knows that their MAGI isn’t yet high enough to contribute to a Roth, but they are thinking about the future, and good on them for doing so.
Clearing the Air On Contributions
Unsurprisingly, a number of Redditors are jumping in here to make sure the original poster knows exactly what to do and how to understand everything that is taking place.
One Redditor in the comments makes it straightforward by saying that there is only a small income window where a tax rate might be high enough to prefer a traditional over a Roth IRA plan. In this case, you need to be somewhere in the 22% tax bracket and under the $77,000 income limit. If you are someone who is in this income and tax window, the Redditor’s original thoughts might hold, but for everyone else, it’s not so simple.
Alternatively, if you are someone who has an employee-sponsored retirement plan like a 401(k), you can’t deduct contributions to a Traditional IRA if your MAGI is high enough to meet the threshold limits. This is why someone would consider doing a backdoor Roth IRA, because it allows them to get around these tricky limitations.
For this Redditor, the immediate advice is that they file jointly (husband and wife), contribute to a non-deductible Traditional IRA, and then convert it to a Roth IRA. They will only owe taxes on any investment gains during the time the money was in a Traditional IRA and not owe taxes on the original contribution amount.
Other Important Advice
Ultimately, what the Redditor needs to do if they want to keep this very clean is either follow the advice immediately above, or stay on their current path and work to max out their Traditional IRA as eligible, and take advantage of the tax benefits.
After this, they should focus on watching their Modified Adjusted Gross Income (MAGI) and see when they will exceed the income limits for a Roth contribution. Of course, the best advice is really to work with a financial advisor, as these kinds of questions are something a fiduciary can help with. They can advise you on the benefits and downsides of a backdoor Roth IRA regarding tax-free growth in retirement.
Finally, it’s super important to remember to keep all of your records of IRA contributions and any conversions for tax purposes. The last thing you want is to find yourself in a sticky position down the road because you went wrong somewhere and end up owing the government more.
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