It isn’t surprising that the Retirement Savings Flavor-of-the-week is Roth IRAs. Contributions are made with after-tax dollars with all growth and earnings withdrawn tax-free in retirement. We often preach the value of Tax Diversification at WealthPoint. This is the concept that having multiple savings vehicles (i.e. Tax-deferred 401(k)/IRAs, Roth IRAs, Taxable Brokerages) with different tax implications allows you flexibility in retirement to lower or smooth out your tax bill each year. However, many clients are surprised by the limits imposed on individuals wishing to contribute to Roth IRAs. For 2019, couples filing joint tax returns cannot max out Roth IRAs if their household income is over $193,000. If your employer offers a 401(k) Roth deferral option you can utilize that, but this is still relatively uncommon.
So where does that leave other high-earning individuals wishing to do more to tax-optimize their retirement savings?
Backdoor Roth IRAs
Backdoor Roth IRAs are not a new concept, and despite their misleading name, the IRS has approved them as a valid means of tax-free savings. The process can seem complicated, and without a knowledgeable financial advisor at your side, can easily cause negative tax consequences. Please refer to the guide below to understand how Backdoor Roth investments are achieved.
These advanced planning areas are where it really pays to have experienced and thorough planners in your corner. If our chart shows that you might be a good candidate for Backdoor Roth contributions or if you would like to learn more, please feel free to reach out and schedule an in-depth financial planning meeting.