The tax filing deadline is rapidly approaching, and this year may be the final year that taxpayers can take advantage of a controversial loophole in the tax code: the Backdoor Roth IRA. Before the window of opportunity closes, it’s worth learning about what this loophole means and if you can take advantage of it.
The Benefits of Roth
First off, it’s important to understand the benefits of contributing to a Roth IRA. Contributors must pay income tax on Roth IRA contributions up-front. However, unlike a traditional IRA, Roth IRAs allow savers to withdraw both principal and investment earnings tax-free after retirement.
In other words, once contributors pay taxes on Roth IRA contributions up-front, they are finished paying taxes regardless of how much investment returns they earn over time.
The only potential caveat to the Roth IRA is that high-income earners cannot make Roth IRA contributions. The current income cut-off point for individuals is $131,000 and for married couples filing jointly it’s $193,000. So if you’re earning income below these levels, you won’t miss anything if the Backdoor Roth IRA conversion loophole is closed.
The basic idea behind the conversion loophole is…
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