What is a backdoor Roth IRA?
Find out if this retirement savings strategy is right for you.
Pros and cons of a backdoor roth ira strategy
As you work with your financial planner, they’ll likely walk you through some of the key benefits and potential pitfalls of a backdoor Roth conversion. To help catch you up to speed, here are a few of the most notable pros and cons of this strategy:
- You can work around the income limit for contributions to Roth IRAs
- You can accomplish this without having to pay taxes on the conversion (if you do not have other pretax IRAs)
- You can add funds to an account that grows tax-free
- Roth IRAs have no RMDs, so they can compound for many years
- If the Roth account is inherited by your children, they will not have to pay taxes on the withdrawals
- If you hadn’t previously minimized the amount of pretax money in your traditional IRA(s), the conversion could result in a substantial tax bill
- Filing taxes for a backdoor Roth IRA strategy can be tricky
- You’ll need to fill out IRS Form 8606 to file your nondeductible contributions
- This is also where you’ll need to calculate the pro rata rule
Trust the experienced professionals in retirement planning
At Edelman Financial Engines, we offer a collaborative wealth planning relationship to help you maximize your investments, tax efficiency, retirement savings and more. If you’re considering a backdoor Roth strategy, don’t hesitate to reach out to our team of financial planning professionals for guidance.
1 IRS (2023, January 1). What if I withdraw money from my IRA? Retrieved on August 9, 2023, from https://www.irs.gov/newsroom/what-if-i-withdraw-money-from-my-ira.
2 IRS (2023, November 4). Roth Comparison Chart. Retrieved on August 9, 2023, from https://www.irs.gov/retirement-plans/roth-comparison-chart
3 IRS (2023, July 5). Retirement Topics - IRA Contribution Limits. Retrieved on August 10, 2023, from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
4 IRS (2022, October 21). 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500. Retrieved on August 10, 2023, from https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.
Investing strategies, such as asset allocation, diversification or rebalancing, do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.