Roth IRAs are an incredible wealth-building tool.
They allow you to grow wealth tax-free for many, many years.
But there is a catch, and it’s one that catches many young people with burgeoning careers unaware.
If you make “too much” money, you can’t directly contribute to a Roth IRA.
But there is a solution…read until the end of the article to see what it is.
How Much Is Too Much for a Roth?
For 2018, if you make more than $135,000 as a single filer or more than $199,000 as married filers, you cannot contribute directly to a Roth IRA.
This amount essentially includes all the money you make during the year, including income from salaries and wages, net income from rental properties, and net self-employment income.
If you make more than these amounts and still directly contribute to a Roth IRA, the IRS will penalize you.
However, if you make more than these amounts, do not fear.
You can make use of a “backdoor Roth IRA” to essentially bypass these income limits and get on track toward tax-free wealth building!
How to Set Up a Backdoor Roth IRA
A backdoor Roth IRA is essentially a traditional IRA that is converted to a Roth IRA.
This works because traditional IRAs have no income limitations on who may contribute to them.
Setting up a backdoor Roth IRA is a 4-step:
- Set up a traditional IRA.
- Convert your traditional IRA to a Roth IRA.
- Pay tax on the conversion.
- Pay tax on gains in your traditional IRA.
Pretty much any reputable broker can do this for you. Just open up a traditional IRA account at any broker and then
We personally recommend Ally Invest due to their low fees and investor-friendly staff.
Click here to open up your traditional IRA at Ally Invest. Then, when you have your traditional IRA set up, call Ally Invest to start the Roth conversion process.
Where Should I Set Up My Backdoor Roth IRA?
Caroline and I have self-directed our backdoor Roth IRAs into private placements, and due to the risky nature of these investments, we do not advise our readers who are just getting started to invest in such things.
For those getting started with a backdoor Roth IRA, we recommend Ally Invest.
Ally Invest has low-cost investing options for everybody.
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