2024 Roth IRA Limits and the Backdoor Roth Strategy - boulaygroup.com (2024)

If you are looking for a smart way to save for retirement, you may want to consider opening or adding to a Roth IRA. A Roth IRA (individual retirement account) is a powerful tool to help you grow your wealth and enjoy tax-free income in your golden years. However, certain rules and limitations associated with this type of investment account make the assistance of a wealth management advisor a valuable addition, especially if your income is above a certain threshold. In this article, Nathan Faith, CFP®, Partner, explains the income and contribution limits of a Roth IRA in 2024 and how to potentially take advantage of a backdoor Roth strategy.

What is a Roth IRA?

A Roth IRA is a type of individual retirement account that allows you to save and invest money for your future with tax advantages. Unlike a traditional IRA, you contribute after-tax dollars to a Roth IRA, meaning you pay taxes on your income before you invest it. However, if you comply with the rules, you can enjoy the key advantage of tax-free withdrawals in retirement. This is a great option to diversify your tax situation and avoid paying taxes on your investment gains in the future.

Income and Contribution Limits

Not everyone can contribute to a Roth IRA, as income limits determine eligibility. For 2024, the income limits are based on your modified adjusted gross income (MAGI) and your tax filing status. The table below shows the income ranges and the corresponding contribution limits for 2024.

• • • If your MAGI is less than the lower limit of your range, you can contribute up to $7,000 ($8,000 if you are 50 or older).
    • If your MAGI is within the range, you can contribute a reduced amount to a Roth IRA, which is calculated by a formula.
    • If your MAGI is above the upper limit of your range, you cannot contribute to a Roth IRA at all.

How Does a Backdoor Roth Strategy Work?

A backdoor Roth strategy is a way to bypass the income limits and contribute to a Roth IRA indirectly. It involves two steps: first, you contribute to a traditional IRA, which has no income limits, but you do not claim a tax deduction for your contribution. Second, you convert your traditional IRA to a Roth IRA, which is a taxable event, but since you already paid taxes on your contribution, you only pay taxes on any earnings that occurred between the contribution and the conversion. This way, you effectively move your money from a traditional IRA to a Roth IRA, regardless of your income level.

If you are considering converting your traditional IRA to a Roth IRA, it’s essential to have a good understanding of the potential risks and caveats involved. To ensure that you’re making the right financial decisions, it’s best to talk with an experienced wealth management advisor. They can provide personalized advice based on your financial situation and help you navigate through the various rules and regulations. For this backdoor method, the pro-rata rule applies if you have other pre-tax IRAs. You must treat all your pre-tax IRAs as one account and pay taxes on the ratio of your pre-tax and after-tax balances. To avoid this, you must either not have any other pre-tax IRAs or move them to a qualified employer plan, like a 401(k), before converting.

The backdoor Roth strategy was a gray area within the tax code for many years. Accountants and financial advisors felt a low-risk approach was to perform the backdoor Roth strategy over several months or even a year due to a rule called the step doctrine (basically, if the IRA contribution/Roth conversion steps were too close together, they could be deemed as one single step which would nullify the tax advantages).The wait time is no longer required as Congress legitimized the strategy six years ago through a conference committee report, effectively confirming the legality of the two-step process. Thus, the steps can now occur simultaneously.

Is a Backdoor Roth Strategy Right for You?

A backdoor Roth strategy can be a smart way to take advantage of the benefits of a Roth IRA, especially if you expect to be in a higher tax bracket in retirement or if you want more flexibility and control over your retirement income. However, it is not a simple or risk-free process, and it requires careful planning and execution. Consult a tax professional before you attempt a backdoor Roth strategy, as they can help you determine your eligibility, calculate your tax liability, and avoid potential pitfalls and penalties. A backdoor Roth strategy is not for everyone, but it may be an option for you if you want to maximize your Roth IRA contributions in 2024.

Helping You Get There…

A Roth IRA and backdoor Roth strategy can be powerful tools to boost your retirement savings and help you enjoy tax-free growth and withdrawals. But they are not one-size-fits-all solutions and may not suit your personal situation or goals. A wealth management advisor helps you navigate the complex rules and regulations of the IRS and design a customized retirement plan that works for you and your financial needs. Connect with a member of the Boulay Financial Advisors, LLC team to learn more about your retirement options. We’re dedicated to helping you get there.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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