Are You Making This COSTLY Backdoor Roth Mistake?
If you’re planning a Backdoor Roth IRA conversion, understanding the pro-rata rule is crucial to avoid unexpected tax bills. This often-overlooked rule can significantly impact your retirement strategy, especially if you have pre-tax funds in any of your IRAs.
In this video, I explain the complexities of the pro-rata rule and how it can affect Backdoor Roth conversions. I’ll start with the basics of IRA contributions, breaking down how pre-tax and after-tax contributions differ. Understanding this distinction is key to helping your conversion go smoothly and minimizing additional taxes.
Additionally, I’ll guide you through the mechanics of Backdoor Roth IRAs, a strategy often used by high earners who exceed Roth contribution limits. You’ll learn to move after-tax contributions from a traditional IRA into a Roth IRA while avoiding unnecessary tax liabilities. Keeping track of your contributions and knowing the difference between pre-tax and after-tax funds is essential for creating a tax-efficient retirement strategy.
The pro-rata rule’s impact is also explored, especially how it applies across all your IRAs, even those held at different financial institutions. Using a practical example of $93,000 in pre-tax funds and a $7,000 Roth conversion, I’ll show how the IRS calculates taxable income during conversions. By understanding this rule, you can optimize your IRA transactions and avoid paying taxes on more than you need, helping you reach your retirement goals more efficiently.
