Backdoor ROTH IRA

This email is part of GoLearnNetworks, Inc. opens in a new windowPractice and Prosper Financial Series.  Let’s start with the new updates in a regular IRA and a ROTH IRA.

You can make an IRA or a ROTH IRA contribution for 2019, but time is of the essence!  The normal deposit deadline of April 15th, 2020 has been extended until July 15th, 2020 due to the COVID-19 Pandemic.  So, you still have a few days to save for you and your family’s future.


Two ways to save for retirement are the standard Individual Retirement Account and a ROTH Account named after Senator William Roth who introduced the Roth IRA as part of the Tax Relief Act of 1997.
 
With a regular IRA account, the contribution is made pre-income tax and income taxes are paid on the back end at time of withdrawal.
 
Roth accounts are funded with post taxed income. Therefore, interest or generated income within the account is tax free upon with withdrawal.
 
For example, many folk trade stocks in their ROTH accounts.  The profits they make stay within the account and are tax free at the time of withdrawal.
 
Naturally, anything tax free has its appeal.  It truly is the Goose that laid the Golden Egg. 
 
How do you know if you qualify for an IRA or a ROTH?  Well here’s what you need to know:
 
IRA accounts do not have income limits as opposed to ROTH IRAs.  For 2020 as a single filer, the modified adjusted gross income limit for a ROTH Account is $139,000.00 and for couples the limit is $209,000.00.
 
If you exceed the income limit for a ROTH, don’t fret…there is a ‘Back Door’ to opening a ROTH account!
 
Because the standard IRA account has no income limits (your earnings can well exceed the ROTH limits of $139,000 for a single and $209,000 for a couple) the maximum contribution can be made within the IRA then immediately converted to a ROTH.  Hence, The Back Door.
 
Obviously, the income tax would have to paid on the amount of the contribution at the time of conversion. Since you are converting to a ROTH, there is no penalty.  Each year the IRA conversion can be made into the same ROTH account.
 
The maximum annual contribution for an IRA and a ROTH IRA is $6000.00 if you are under the age of 50 and $7000.00 for those age 50 and over.  That’s an increase of $500.00 from 2018.
 
Note this…when making the conversion, put it straight into the ROTH, DO NOT take possession directly of the transferring funds (meaning putting it in your name) or you will have to pay a penalty…usually around 10% which would be $600 to $700 for a maximum contribution.
 
And remember, you can hire your children (put it in writing, i.e., a contract with responsibilities and pay) so they can contribute to their ROTH and you get a tax deduction.
 
If you are reading this and you are over the age of 18, emancipated and not a full time student, you may be eligible for a RSCC (Retirement Savings Contribution Credit) that can range from 10% to 50% of the first $2000.00 contributed to your ROTH ($4000.00 if married and filing jointly).
 
To qualify for the tax credit, married couples have to have an adjusted gross income of less than $65,000.00 a year; a head of household AGI would be below $48,750.00 and single filers below $32,500.00.
 
So, if your 20 something child is a non-dependent and not a fulltime student earning let’s say $25,000.00 a year and puts $2000.00 in a ROTH, that child would receive a 50% tax credit of $1000.00!
 
What happens when you want your money? 
 
Withdrawals from a ROTH are tax free and penalty free after the age of 59 ½ and the account has been established for 5 years.  If you are under the age of 59 ½ and need a withdrawal for a qualified reason, you may be able to avoid the penalty but not the tax on any interest or growth.
If you are 59 ½ or older but have not had the account for 5 or more years, your withdrawals will be subject to taxes on interest and/or growth but the penalties will be waived.
 
This information is provided courtesy of GoLearnNetwork’s Accountants: 

Junco & Kierzynski CPA 
Tampa, FL 33607
(813) 291-9090
 
We always recommend verifying the information with your Accountant, banker, broker or Tax Attorney as laws can change.


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