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A backdoor Roth IRA is a way for people with high incomes to sidestep the Roth's income limits.
Basically, a backdoor Roth IRA boils down to some fancy administrative work: You put money in a traditional IRA, convert your contributed funds into a Roth IRA, pay some taxes and you're done. Even though you didn’t qualify to contribute to a Roth, you get to go in the back door anyway, no matter what your income.
That's good news, because your money grows tax-free -- and that's a pretty sweet perk when it comes time to take your money out in retirement.
About those Roth IRA income limits: For 2021, the government allows only those people with modified adjusted gross incomes below $208,000 (married filing jointly) or $140,000 (single) to contribute to a Roth IRA.
If your income is above the limit, a backdoor Roth might be a good solution for you. (Check out this story for more on .)
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Here’s a step-by-step guide on how to make a backdoor Roth IRA conversion:
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Keep these rules in mind to avoid penalties:
A backdoor Roth IRA is probably a bad idea if ...