Backdoor Roth IRA

  

First, see Roth IRA. The main difference between a Roth IRA and a traditional IRA is that you pay taxes up front on a Roth, whereas you are not taxed on your savings with a traditional IRA until you withdraw it.

This is great for those whose tax rates are lower now than they will be in the future, such as recent college grads. But let's say you've already put money into a traditional IRA and want to convert it to a Roth IRA because there are no income or contribution limits for conversions.

Called a backdoor Roth IRA, the only hitch is the amount you transfer will be considered income that might put you in a higher tax bracket just for that year. And you can only do one backdoor Roth IRA conversion per year.

Let's say you are under 50 and have $200,000 in your traditional IRA account pre-tax. So you decide to open a Roth IRA and transfer $50,000 to it. You won't have to worry about the $5,500 per year contribution limit, nor the income limit for singles or married couples. However, since these are converted funds and not contributions, you will have to wait five years to be able to have free access to your funds. You will also have to add $50,000 to your gross income on your tax return. You might want to look before you leap with your tax adviser.

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