Backdoor Roth IRA Explained (Step by Step Process)

0:00 The backdoor R Ira can best be described as a tax loophole that allows investors that are barred from investing in a r Ira to actually invest in a rough IRA just not directly it is a surprise to me that the IRS has not banned this tax strategy as it is highly effective at minimizing the tax liability from Investments and it is surprisingly easy to do once you have the proper knowledge of it in this video I'm going to tell you exactly what you need to know about

0:28 The backdor IRA and show you the specific steps needed to actually take a traditional IRA and convert it to a Roth IRA which is the backdoor rth Ira in 1997 Congress passed the taxpayer Relief act into law which established the rth IRA as an investment vehicle and allowed for tax-free growth and tax-free qualified withdrawals at the time posting this video in 2024 the maximum contribution to cumulatively to a rough or traditional Ira is just $7,000 and the taxpayer Relief act

1:04 Actually set contribution limits on People based on their income amounts and their filing status the government wants to encourage people to save for retirement because this leads to a more stable Society where people aren't just depending on the government this is why Congress allowed this bill to pass in the first place I started researching the backdoor Roth IRA personally because it affects my family it's not cuz we make a lot of money it's actually

1:29 Because my wife and I file Mary filing separately because she is on an income-driven repayment plan for her student loans filing separately helps us avoid having to make large student debt repayments however choosing the status of married filing separately is very punishing from a tax perspective and one of those punishments is actually that we cannot contribute to a Roth IRA unless we each make less than $110,000 a year and it's not just those that are fing

2:00 Married violing separately that are barred from contributing to a rough IRA any individual that makes more than $161,000 a year or $240,000 as a married couple is also barred from investing in a raw IRA and this is where the back door rough IRA comes into play it is surprisingly easy to get around these contribution restrictions all you have to do is follow a simple three-step process first you should set up an account with a broker if you don't already have one and

2:31 Then you're going to go ahead and open up a traditional IRA and a rough IRA second you should make non-deductible contributions to your traditional IRA there's really nothing extra to do here besides making the contribution you just need to make sure that you don't actually take the deduction when it comes time to do your taxes now most likely if you're watching this video you're already probably going to be borred from deductions that come from making a traditional IRA contribution

2:57 And your tax software is going to know that based on your filing status an income level so just make sure you don't take any sort of deductions for those contributions to your traditional IRA and you should be good for this step just for a little background info here one of the key aspects that makes a back door off IRA work is just the fact that you can contribute to a traditional IRA and not take any tax deductions regardless of your income level there's

3:20 Really no benefit unless you're planning on making a backd door RAV Ira converting that traditional IRA into a RAV Ira that has some really good tax benefits so that brings us to our third step the first step is going to be to actually take that traditional IRA with your non-deductible contributions and convert that into a rough IRA this step can vary a lot depending on the broker that you are using I personally use Robin Hood right now so it's as simple

3:49 As navigating to that retirement Tab and clicking the option that says start a rough conversion and following the rest of those instructions it is also worth mentioning that for Robin Hood specifically you cannot actually convert the Assets in a traditional IRA to a rough IRA Robin Hood will actually force you to sell those assets prior to conversion this has nothing to do with a tax law or anything like that this is just currently what Robin Hood supports

4:14 Now this next part is very important you should make that conversion from a traditional IRA to a rough IRA as soon as you contribute that non-deductible amount the reason being is because any gains that you're going to make in that traditional IRA any div you receive they are going to be taxed upon conversion to the rough IRA so clearly the most tax efficient way to handle this conversion is going to be to just make that non-deductible contribution and then

4:41 Pretty much immediately before you do anything with it convert it to the ra Ira I would recommend just a Cadence of once a year make your contribution to that traditional IRA and then immediately convert that way you're not going to have any unexpected tax consequences again if you convert that traditional IRA to a raw IRA and then you start making gains you start getting paid dividends all that good stuff in the rth ira then you're never going to

5:06 Be taxed on any of it so this is the move unless you like paying more money to the government this is why the conversion can be so complicated and tax burdensome for those who have built up a large traditional IRA account it's because they have gains and dividends that they've received in that account over the years and they're going to get taxed on all of it upon conversion to a raw Ira so the most strategic best way to do this if you do have a large

5:32 Balance in a traditional rough IRA is going to be to convert as much as you can every year without actually getting into that next higher tax bracket remember contributions or sorry conversions from a traditional to a off Ira are treated like income so you just want to contribute as much as you can without hitting that next tax bracket to minimize your tax liability one last thing you should consider is that there's the 5year rule so if you convert

5:59 From a traditional to a rough IRA each time you're going to have a 5-year waiting period before you can withdraw penalty-free from that ra IRA account remember regular contributions to ra Ira not the gains but the contributions can be taken out at any time that is not the case if you're converting from a traditional to a rough IRA you're going to need to wait 5 years upon each conversion or you're going to get penalized unless you're above 59 1/2

6:24 Years old so as long as you don't take money out of your ra Ira which you shouldn't anyway this would only be an emergency you needed to cover something that you just didn't have the funds for that's critical then if you don't take out of the rough IRA you don't even have to worry about it to begin with but it is worth mentioning and yeah those are the basics of a back door rough IRA thank you so much for watching if you found value in this video and you would

6:49 Like to see a video about how to find short squeeze candidates before anyone else click the link on screen now