How to Build Wealth - Backdoor Roth Conversion (Part 4)

We just discussed Roth IRA’s and their tax deferred powers, but what do you do if you have an income over $135,000 (single) and $199,000 (married, filing jointly)? Now we get into the weird world of backdoor Roth IRA’s. Basically, while you cannot directly apply funds to a Roth IRA, you can leverage this conversion to apply funds to a roth IRA.

Things to Know Before Getting Started
First off, you cannot have a tax deferred IRA already in your name. This includes all IRA’s but does not include your 401k, or similar employer sponsored retirement account. Still on track? Awesome. Also, this contribution counts towards your $5,500 a year maximum, if you qualify for a standard IRA contribution, that would definitely be the way to go.

Step 1: The Traditional IRA
Leverage whatever brokerage you would like (personally, I use vanguard) and open a traditional IRA, follow the prompts and wait for confirmation. Fund the account however you would like as well (I use a transfer from my bank). 

Step 2: The Lateral Move (Convert to a Roth)
This step is really going to depend on the brokerage you have chosen, but basically, you find the “convert” option and you transfer the funds from your Traditional IRA to a Roth IRA, if you do not have a Roth IRA, you will need to open one. You may see a warning that this is a taxable event, however, because you made a non-deductible contribution, this can largely be ignored. Again, I am not a financial advisor, if you leverage one, they can guide you in this process.

Additional Note
This seems odd, and I know - it is, I personally had a long hard look at backdoor roth’s before making this post. That said, it really can reduce the taxability on your gains, which alone can make it worthwhile. Lowering your tax liability is a great way to avoid lifestyle creep, and also, is an excellent way to save for your early retirement.