Backdoor IRAs: Another way to save on taxes in retirement
Unless you’ve filed an extension with the Internal Revenue Service, the 2016 tax year is now history. You’re probably ready to take a break from thinking about taxes at all, but there is no time like the present to consider how you might save on future payments to Uncle Sam — particularly if you’re a high income earner ramping your saving for your golden years.
There is a great strategy that high-earning households could be overlooking that may save significant taxes in retirement: setting up a Roth Individual Retirement Account.
Roth IRAs are attractive for several reasons. While funded with after-tax dollars, any earnings are tax-deferred and withdrawals in retirement are tax-free. In addition, Roth IRAs are not subject to the minimum annual withdrawals required from traditional IRAs during retirement, so they can also be an excellent tax-planning tool.
The Roth IRA is a so-called backdoor way for high-income households to save more for retirement.
Because there are income limits to open a Roth IRA, most people earning high salaries don’t believe a Roth IRA is an option. Under the law, a single person with an annual adjusted gross income of $133,000 or more and a married couple making more than $196,000 cannot directly fund a Roth IRA.
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