The back door Roth: What is it and is it still available to investors in 2022?

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401k, IRA: How to choose a retirement plan that’s best for you

There are many different retirement savings plans – traditional IRA, Roth IRA, 401k. Here’s how to choose the one that will help you reach your goals.

USA TODAY

In late 2021, there were murmurs that the opportunity for backdoor Roth contributions would be gone in 2022. But after President Joe Biden’s Build Back Better plan stalled in the Senate before the new year, 2022 is now a renewed moment for higher-income earners to fund their Roth IRAs. 

Here, we’ll revisit what a backdoor Roth contribution is, how to execute one, and if you should do so for 2022. 

What’s a backdoor Roth, anyway?

One of the defining characteristics of Roth IRAs is their relatively low contribution limits: In 2022, savers are eligible to contribute up to $6,000 for the year, with a $1,000 catch-up contribution available if you’re over the age of 50.  

But Roth IRAs also come with income limits; that is, you won’t be able to contribute directly to a Roth IRA unless you earn less than $144,000 (single filers) or $214,000 (married filers). 

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In essence, the backdoor Roth IRA exists to help high-income savers get around the prescribed income limits.

By following the steps below, you’ll be able to complete a backdoor Roth contribution of your own: 

  • Open a traditional IRA. This is a non-Roth account that is meant to hold pre-tax money, but will also accept after-tax contributions. 
  • If you don’t have a Roth IRA, open one. If you already have a Roth IRA, you can use that one.
  • Contribute money to the traditional IRA. You don’t need to contribute the maximum all at once, but you’re certainly welcome to do so if you have the means.
  • Do not invest the money. This can distort the ultimate goal of getting money to your Roth IRA tax-free. 
  • Convert the traditional IRA to your Roth IRA. You should have an option to “Convert to Roth” on your selected brokerage provider’s account page.
  • Invest the money once its been converted to your Roth. This allows you to take advantage of tax-free growth and earnings for the rest of your life.
  • Repeat for every year you expect to exceed the income limits. 

Important note: Before starting this process, make sure you have no other pre-tax IRAs at any other financial institution. If you do, your Roth conversion may be partly taxable, something you’ll want to avoid. 

► How to max out your Roth IRA:  Planning ahead, automatic contributions

Why the Roth IRA wins in the long run

The Roth IRA is unique in that it provides tax-exempt space for you to invest for the long term, and it’s otherwise inaccessible to higher-income earners without the backdoor option. It’s a worthwhile process for a few reasons.

First, you’ll lock in a zero tax liability for any invested Roth funds for the rest of your life. The psychological freedom associated with a zero tax liability is unmatched, as you know every single dollar of your Roth savings is entirely yours. 

Next, and somewhat related to the previous point, nobody has any idea what tax rates will be in the future, but the tea leaves point to tax increases. By agreeing to pay tax at today’s rates and contributing money to a Roth, there’s a good chance you’ll save money in the long run. 

And finally, Roth IRAs are great estate-planning tools that don’t come with required minimum distributions during your life. This means that your account has the potential to grow to extraordinary heights before it ever has to be depleted.  

Could the law change later this year?

If we’ve learned anything over the past several years, it’s that anything is possible. There is always the chance that some version of Build Back Better does eventually pass, and it could contain a law that prohibits the conversion of after-tax money to Roth accounts. This would effectively “shut the door” on the backdoor Roth process. 

The real question would then be whether or not the law would be retroactively applicable to Jan. 1, 2022, though the chances of this happening are certainly unlikely. A more likely outcome would be for the prohibition of converting after-tax money to begin in 2023, or possibly never. 

In short, as of today, the law permits backdoor Roth IRA contributions, and it’s generally in investors’ best interests to take advantage of them as soon as possible this year. 

► Retirement:  See how 2022 changes to 401Ks, IRAs will benefit you

Protect your retirement: Add to your Roth

Even if you’re a high earner, there’s still a benefit to completing the backdoor Roth process for both the 2021 and 2022 tax years. You’ll be building a war chest of tax-free money that no legislation can take away – something most anyone can get behind. Get started today and let your money work for you. 

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