[quote=plm][quote=flu][quote=livinincali]In general a Roth has only 1 advantage over just saving the money outside of a retirement account. That one advantage is that capital gains are tax free. There are a plethora of drawbacks to that one advantage and they include. The money usually can’t be withdrawn without penalty. The investment options tend to be somewhat limited (For example it isn’t easy to invest Roth funds in a rental property). There’s no guarantee that your investment will grow with significant capital gains. There’s no guarantee that the government own’t change rules about tax rates in the future. So in effect they’ve sold you on this dream that you’re going to take $100K, grow it into $500K that’s all going to be tax free but the odds or you doing that and the money staying tax free might not be that great. Unfortunately nobody knows the answers to those questions.[/quote]
That’s not exactly true. Your contribution portion can be drawn without tax consequences because that portion you already paid taxes on. The same idea of how you convert from a traditional IRA to backdoor Roth IRA works on this idea. You can’t qualify for a normal Roth so you co tribute to a traditional IRA and then you immediately roll it over to a Roth with no penalties since you didn’t earn anything in the traditional ira.
There are certain rules that you have to work within[/quote]
I never did a traditional IRA since there was no tax benefit. But I didn’t know I could qualify to convert the traditional IRA into a Roth IRA even though I don’t qualify for the Roth IRA. Really strange loop hole. So I should fund an IRA before the end of year.
Thanks[/quote]
Be very careful about doing this. There are very tedious rules concerning this and you need to understand them.
For starters, it will only work if you do not have any other IRA accounts. When you take a distribution out of an IRA, they consider the distribution taken across ALL of your IRA accounts. You cannot say you are only taking a distribution out of one account. So for exsmpke, if you also have a rollover IRA, and you withdraw $3000 out of your traditional IRA account you just set up, the IRS will treat this as you taking a distribution out of BOTH your rollover IRA and traditional IRA, and you will owe taxes since your rollover IRA is pretax. This backdoor Roth conversion only works if you have no other iras.
Also, the IRS treats 401ks different from iras. So if you have a 401k and no rollover IRA, you can use a traditional IRA to backdoor contribute to a Roth IRA.
There are some workarounds if you have other iras. For example, if you have a rollover IRA, and your existing 401k allows it, you could rollover your rollover IRA into your existing 401k and then you can do a backdoor Roth…but then you have to consider the quality of the 401k plan you have. Some 401ks have funds that just suck.
Yeah, its pretty messed up.
For details, talk to a CPA or Google “backdoor Roth IRA” contributions.
