The Tax Man Cometh?
Your biggest expense in life is likely to be taxes. Roth IRAs can be a wonderful way to shield yourself from taxes and really build wealth. If you follow the rules, the dollars in a Roth IRA are never taxed again — not taxed on the investment earnings, and not even when you take the money out.

Sadly, many high income earners mistakenly believe that they are shut off from Roth IRAs on account of income limits. While it may be true you can earn too much to qualify for a direct Roth IRA contribution, you could always use what's become known as "the back door" by taking advantage of a process known as a Backdoor Roth IRA.

The Path to the Backdoor
The Backdoor Roth became a reality in 2010 when income limits on IRA conversions were lifted. In a nutshell, the process involves a one-two process of opening a traditional nondeductible IRA and then converting it to a Roth IRA. Voila­­, your Backdoor Roth IRA!

There's Always a Catch
There is sometimes a catch that comes into play and takes people off guard: the Pro-Rata Rule. When a traditional IRA is converted into a Roth IRA, the IRS runs a calculation to determine how much of the converted amount will be considered pre-tax and how much post-tax. In this calculation, the IRS treats all your traditional IRAs as one big IRA account (including SEP and SIMPLE IRAs, too). Here's a formula to figure out how much of amount destined for your Roth IRA will end up as taxable income on your tax return:

From Episode 3, The Basics of Self-Directed IRAs
October 15, 2019

(and how to avoid problems with it)

The Side Door Just before the Back Door
If you'd really like to avoid the consequences of the Pro-Rata Rule, there may be a workaround available. That's because the IRS doesn't apply the Pro Rata Rule to balances in employer plans such as a 401k, 403b or Solo 401k. If you have such a company retirement plan available to you, check to see whether roll-ins of IRA funds are allowed. If the answer is yes and the company retirement plan is of sufficient quality, you could roll all your IRA funds into your company retirement plan and complete your backdoor Roth IRA without increasing your taxable income.

Here's a cheat sheet to map it out visually:
Tailored Solution
If you're interested in setting up a Backdoor Roth IRA and would like a customized solution for your particular circumstances, please reach out to us at to schedule a call or meeting.

~ Matthew Lewis, Private Wealth Advisor , WestBridge Wealth Management

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. This content was created as of the specific date indicated and reflects the author's views as of that date.
Past performance is no guarantee of future results. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
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