Tag: IRA

It’s hard to answer to this because for some it may be a good idea and for some it might be a bad idea. Because it varies from person to person but it is super bad idea if =

1) You will need that money you put into the backdoor Roth IRA in less than 5 years. 

This is because the money which you put to backdoor Roth IRA through the converting process from an IRA to a Roth IRA falls for whatever reason under the category of Roth IRA five-year rule. Which is if you don’t wait 5 years to take it out then you will probably have to be charged with a penalty which is called “10% early withdrawal penalty”

2) The only way you can pay off your taxes with is through the money you get from your IRA withdrawal.

By doing this you sacrifice the investment growth on your money in the future. You will also face a risk of you are under the age of 59 1/2 you will pay the “10% early withdrawal penalty”.

3) And this last one is about the withdrawal from your IRA which will push you into a higher income tax bracket.

For the most part it is a good idea to  convert just enough that you’re not pushed into paying a higher tax rate that year.

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Many beginners in the investing world doesn’t know this but the IRS requires rollovers from traditional IRAs to Roth IRAs to be done in the pro rata way.

The way it works is through the point when the determining your tax bill on a conversion from a traditional IRA to a Roth IRA. The IRS here is going to look at the way your traditional IRA accounts  are combined.

If or when all of your traditional IRAs accounts are combined consist of something like 80% pre-tax money and 40% after-tax money. Then that ratio determines what percentage of the money which you can convert to a Roth IRA is going to be taxable.

Its important to keep in mind about this topic that IRS applies the pro-rata rule to your total IRA balance at year-end. 

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To avoid any forms of penalties you would like to keep in mind these rules I’m about to mention below.

To avoid to any forms of penalties you need to have at least one of these following rules :

A trustee-to-trustee transfer

This one is about the fact where the IRA provider sends the money. Is it directly to your Roth IRA provider? Or is it somewhere else?

A rollover 

This one is about the fact where you receive the money from your IRA together with the deposit it into the Roth which needs to happen within 60 days.

A “same trustee transfer

This one is about the fact where your money goes from the IRA. Because it needs to go to the Roth at the same financial institution.

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Keep in mind that this year the contribution are $6,000 or people younger than 50 and $7,000 for people older than 50.

Single

– Between $129,000 and $144,000 = Contribution is reduced

– $144,000 and more = No contribution allowed

Married filing separately

– Less than $10,000 = Contribution is reduced

– $10,000 and more = No contribution allowed

Married filing jointly + qualifying widow / widower

-Between $204,000 and $214,000 = Contribution is reduced

-$214,000 and more = No contribution allowed

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Both of the Traditional IRAs and Roth IRAs have some restrictions in certain circumstances. And these restrictions are = 

1) Traditional IRA deduction limits

This one is all about you being able to contribute the full amount. However your ability to deduct contributions may be reduced at sometime or also be eliminated if you have a 401(k) or other retirement plan at work.

No matter how much you earn you can make a deduction in full if you don’t are covered by a retirement plan at work.

2) Roth IRA contribution limits.

This last one is about the amount which you can contribute is reduced at higher incomes.

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To go straight to the topic the annual IRA contribution limit for this year (2022) is $6,000 if you are under the age of 50. But if you are 50 or are older than 50 then your limit is $7,000.

However there are some extra restrictions which are relevant for some people but not for all.

The contribution limits apply to you when you combine the traditional and Roth IRA contributions.

The Roth IRA contributions may be limited for you if your MAGI (modified adjusted gross income) is over a specific threshold.

However the annual contribution limit is simply just one simple part of the IRA contribution rules.

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Believe it or not but there are many types of IRA and just just the traditional IRA and Roth IRA. And today we will talk about some of them.

The most popular IRAs expect of the Traditional IRA and Roth IRA are SEP IRA and Simple IRA.

However we have also IRAs like =

– Spousal IRA

– Self-directed IRA

– Inherited IRA

– Backdoor Roth IRA

-Rollover IRA

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