Last week, we explored the concept of FAST goals, emphasizing the importance of taking immediate action for goal attainment. If you’re looking for an effective financial strategy to take action in the new year, then the Back-Door Roth IRA could be a strong option to consider.
Back-Door Roth IRA: A Strategic Financial Move
If your Modified Adjusted Gross Income (MAGI) is more than $240,000 (for married couples) or $161,000 (for single filers), you cannot contribute directly to a Roth IRA. However, you can use a Back-Door Roth IRA as a workaround. This involves investing in a non-deductible IRA and then converting it to a Roth IRA. The contribution limits per person are $7,000 or $8,000 if you’re aged 50 or older.
Roth IRA Benefits
The key advantages of a Roth IRA are twofold: first, withdrawals during retirement are income tax-free. Second, Roth IRAs do not mandate Required Minimum Distributions (RMDs).
Crafting a Comprehensive Financial Strategy
In addition to a Roth IRA, it can be beneficial to also have savings in a traditional retirement account and an after-tax personal investment account. By having funds in each of these three accounts, you can decide how much you want to withdraw from each one. This flexibility can give you significant control over your income taxes throughout your retirement years.
Personalized Guidance
There is no one-size-fits-all solution when it comes to savings and retirement planning. Because the decisions can be complex and depend on your unique circumstances, it is essential to consider consulting with a financial advisor or tax advisor to help you determine which option best suits your specific situation.
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Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including 50 Rules of Success; J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.
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