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Joe Anderson
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As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

President of Pure Financial Advisors, Joe Anderson, CFP® explains that a backdoor IRA is a tax loophole; it allows individuals and married couples to contribute to a Roth IRA if they otherwise wouldn’t qualify.


Transcription:

“Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors, and welcome to Question of the Week. I’m getting this question quite a bit: what is a backdoor Roth IRA? The back to a Roth IRA is a tax loophole. It allows individuals and married couples to contribute to a Roth IRA if you otherwise wouldn’t qualify. There are qualifications to do a Roth IRA contribution; the AGI [Adjusted Gross Income] limits are $193,000 if you’re married and $131,000 if you’re single. If you make too much money the IRS does not allow you to directly put money into a Roth IRA. However, what the IRS code says is that anyone can contribute to a traditional IRA as long as you’re under 70 1/2 and have earned income. So if I’m making too much money where I can’t put it directly into a Roth IRA, I CAN put the money into a traditional IRA. If I’m under 50, the contribution limits are $5,500.

Here’s the example: I’m making too much money and I’m a married man. My AGI limitations are $193,000 assuming I’m making $200,000 a year. I can then take my $5,500 contribution and put that directly into an IRA (a traditional IRA). Because I’m making $200,000 I cannot take the tax deduction, so what is called basis in that IRA is an after-tax contribution. I can take that after-tax contribution and then directly convert that into a Roth IRA because there is no AGI limitations for Roth IRA conversions, hence the word backdoor. I have to take two steps here: I have to go to the traditional IRA first, and then I can convert it into the Roth IRA no matter what my income is. Here’s the catch: if you have any other IRAs, then you have to look at the pro rata and aggregation rules. It gets a little complex, so I would highly recommend talking to a qualified advisor or your CPA.

I’m Joe Anderson, and this was your Question of the Week.”