You don’t need a ninja suit and a broom to sneak through this clean back door and “steal” an extra $10k.
Many of my clients see the income limit for contributing to a Roth IRA ($150k/year single; $228k/year married) and give up on this wholly beneficial retirement account.
This year, the contribution limit is $6,500 for an individual. Since a Roth IRA grows tax free and is 100% yours, it is an account everyone should take advantage of. Unfortunately the income limits leave many to believe it is not an option. I am here to show you exactly how to get in that back door, cleanly.
- In order for this to work, you must not have money in any other IRA accounts: traditional, rollover, SEP or SIMPLE. This does not include other types of employer accounts like 401(k), 403(b), etc.
- Open a traditional IRA account and contribute $6,500 for 2023 (if under age 50 – $7,500 if older)
- Wait for a few weeks/months and open a Roth IRA and transfer the money from the traditional to the Roth account. Then invest your cash into a low cost index fund and get excited about your extra $10k of tax-savings.
That’s it. Clean and simple. So what are you waiting for?
I want to put an extra $10,000 in your pocket, and so today I'm going to tell you how to do that using the Clean Back Door Roth IRA contributions. Welcome to Financial Life Planning. I'm your host, Mike Morton, Certified Financial Planner and today, I'm flying solo today, it's just me. But I wanted to record a quick episode around using the backdoor Roth IRA, because I am talking about this concept all the time with my clients. So again, just wanted to record a quick and easy episode for you around the Clean Back Door Roth IRA. This is from my friend, Megan Russell uses this the Clean Back Door Roth IRA, this is the simplest implementation of this concept that puts extra money in your pocket. Why do I say $10,000? Because this year in 2023, you could contribute to a Roth IRA if you're under certain income limits up to $6,500. So $6,500 in your Roth IRA, would grow tax free and be tax free forever, I run across many clients that are above the income limit. And so they just don't contribute it all to their IRA or Roth IRA, you know, because they can't put the money directly into a Roth IRA. So they would save that extra income, $6,500, just in their brokerage account. Okay, so with some simple math, you want $6,500 in the brokerage, or if you can get into the Roth IRA, growing tax free in 20 years, you're going to end up with an extra $10,000 just for that one time contribution and you could do this every single year. That's why it's really important to understand if you fall into this being able to use the clean backdoor Roth IRA, you really, really, really want to take a look at this. Alright, so how does this work? Well, you want to contribute the Roth IRA, tax free forever, you get the money in there, grows tax free. It's awesome. I love Roth IRAs. But the problem is, if you're above a certain income limit, you cannot contribute directly to a Roth IRA. If you are single, then if you're making more than about $150,000 and if you're married together as a family, if you're making more than about $228,000, then you cannot contribute directly to a Roth IRA. And this is where I run into so many clients saying, Well, I can't contribute to the Roth IRA because my income is too high. So I know that I can't do that and they just stop right there. But I want you to take a little step further, okay. So if you're over that, if you're under the income limit, go directly to the Roth IRA and you're good to go. But if you're over that income limit, here's how the Clean Back Door Roth IRA works. If you have no other money in an individual retirement account, that's the big caveat that's the clean part, you have no money in a SEP IRA, a traditional IRA, a rollover IRA, or a simple IRA are all an IRA, okay, but if you have no money in any of those IRAs, traditional rollover, simple, or SEP, you have to have no money in any of those kinds of accounts, you can have 401K's, you can have 403B's, other types of deferred comp plans and other stuff for for the sevens, all kinds of numbers, but nothing in an IRA. That's the clean part. If you have no other IRA money, then you can go to the next step and do this. Alright, and what you want to do, again, you're above the income limit, to contribute directly to a Roth IRA but you have no other money in any other type of IRA, then you can contribute to your traditional IRA. So you open up a traditional IRA, and contribute this year $6,500, if you're under the age of 50. So you could just look it up every year, okay, a very simple Google search. So you contribute $6,500 into that traditional IRA, then you wait some period of time, don't invest the money, keep it in just in cash sitting there, usually a week or two or a month, you can leave it in there for a little while and then you want to transfer the balance of your traditional IRA, that $6,500 into your Roth IRA. So if you don't have these IRAs, of course, you have to open up the accounts first. Okay. And then you transfer the balance into the Roth IRA. So again, you open up a traditional IRA, open up a Roth IRA, you contributed $6,500, you waited a week, month or so, then you transfer into the Roth IRA, then you can invest that $6,500 into some low cost index funds, and let it grow. Alright, and that's how you get money into the Roth IRA through the backdoor. We say the front door is I'm under the income limit. I can contribute directly to the Roth IRA. That's great. But if you're over the income limit, you have to sneak in the backdoor. Alright, by putting in the traditional and then moving to the Roth, the IRS has rules around this. That's why you don't want to kind of do it just within that same day. They could look at that and say, hey, you're just trying to get around our rules. So you say, no, I put it in the traditional but then I changed my mind decided to put it in the Roth. These are done all the time, you could do a little research, I recommend and do this all the time with clients, but of course, this is not financial advice. Disclaimer, this is just information for you to take a look at and check out that and what makes this clean, or what makes this the Clean Back Door Roth IRA. The reason again, is because you have no money in any of those different IRA accounts. Now if you say, Mike, but I have a traditional IRA with some money in it, or I have a rollover IRA from my previous job, well, then we're going to do another podcast for you. All right, this does not apply directly. This is only in those instances, the clean back door. Now the other thing I will mention here is if you're a couple, maybe one of you has a rollover IRA, but the other does not. Remember, these are individual retirement accounts so say one partner is working and had a previous job and then roll that over to a rollover IRA. But the other spouse or partner doesn't have any of those IRAs I mentioned earlier than that person can do this. Alright, so one of those two partners, these are individual accounts, so they apply to you individually. Now remember, you need earned income to be able to contribute to your individual retirement account as well but your spouse's income or your partner's income works as well. So you don't have to make the money yourself, as long as your partner makes some money if you're doing married filing jointly. So again, why do I recommend this because it's a no brainer when it comes to getting that extra $10,000 in your pocket. Taxes are no joke. Every year, you're paying taxes on that interest in dividends. All right, when you go and sell it an investment, you're paying taxes on the capital gains, it's little dollars here and there. But that stuff makes a big difference. Whereas growing tax free, tax free forever, has no drag, and you can get the full amount of growth and that's why you end up with an extra $10,000 bucks. So I hope this made sense. Try to make it super straightforward. Of course, maybe in future episodes, we'll talk about some of the caveats and if you have any questions of course, reach out to me anytime.