Simple Back Door ROTH IRA Guide 2024 (TAX FREE FOR LIFE!)

this video is going to take the unnecessarily confusing topic of the backdoor Roth IRA and simplify it for you if you clicked on this video you probably already know what the Roth IRA is but I'm going to start this video with like a 30 second explanation of why I think everyone should be maxing this out no matter what age you are then I'll take you through step by step how to set up this backdoor Roth IRA especially with the updates for 2023 and then I'm going to finish the video with three mistakes that I see a lot of people making in the Roth IRA in general but definitely with this backdoor Roth IRA for those of you that are new my name is Professor G and this is a weekly segment called office hours that I do where I go ahead and pick one of your questions from the week and I answer it the same way that I do after a lecture if a student comes to my office and we just go deeper into that topic I made this channel to make investing simplified so let's get to it so why the Roth IRA plain and simple because taxes are going to get worse and 10 years and in 20 years they're going to be way worse and inflation is going to be insane and in 30 years unimaginable would you rather pay the tax on the small amount that you'll invest today let it grow and compound to be 10 times as much and then never have to pay taxes on any of that or would you rather get the little tax break now and have to pay taxes on your hundreds of thousands of dollars later on when you should just be enjoying retirement yeah I thought so now the Roth IRA differs from your 401k and you can have both and I do have both but the 401K is pre-tax dollars and it takes away from your taxable income and it's something that your company is giving to you and hopefully matching your contribution and so it's definitely a good investment Avenue in a couple of the videos that I've done I've outlined the steps of where you should put your money and how you should invest it in what order and the 401K match and the Roth IRA are consistently things that I see people much wiser than myself telling other people to do and do in themselves so I definitely recommend doing that so obviously the Roth IRA is a great idea but there's one problem if you're making too much money there's actually an income limit to who can actually contribute to the Roth IRA before this video I'm going to be showing you all through Charles Schwab because that's my favorite investing platform but you can do all of these steps in Vanguard or Fidelity or any of the other big ones so first and foremost let's talk about that contribution limit for 2023 they actually raised a couple of different things so let's talk about it a single person your modified adjusted gross income must be under 144 000 for 2022 or 153 000 for 2023. if you're married and filed jointly then it has to be under 214 000 for tax year 2022 or 228 000 for tax year 2023. now for the tax year 2022 if you're under 50 years old the maximum amount you can contribute is six thousand and it's seven thousand if you're 50 or older for 2023 they actually upped it five hundred dollars for both you can also see that it starts to phase out actually at a hundred and thirty thousand or so or 205 000 for married couples it doesn't just go straight from six thousand down to zero so if your income is within any of these numbers this is the maximum amount that you can contribute and in 2023 it's a little bit higher of an amount and it's a different amount as far as how much you can put in there so now if you are under that income limit it's very easy you just make the Roth IRA which I'm going to show you step by step how to even just make that regular account but if you are over these limits then you're going to want to watch closely to this next part because what I'm going to do is I'm going to walk you step by step through it so that you can watch the video you can pause it and do it side by side now there are going to be some steps that you're going to have to do that may take a couple of days because anytime you're opening up like a new bank account or something sometimes it takes a day or two because they have to run your social security or background check or whatever because this is banking and it is it does have to do with money and all of that kind of stuff so you may come back to this after each step is done so anyway let's get to it so what you're going to do is you're going to go to whatever investing uh platform that you're going to use and for me I really like Charles Schwab and you're just going to go to open an account what we're looking for the Roth IRA here or the traditional IRA and we're actually going to start by opening a traditional IRA just a regular Ira so you're going to click on this here and then we're just going to go ahead and get started so now I'm not going to go through all of this this is just standard as if you were going to start any bank account or even a social media account you're just going to put in all of your information you're going to put in your Banks information so that you can transfer money back and forth and they'll probably ask you things like how much money do you make and what are you going to be using this account for you're just going to click retirement and you can put in whatever amount of money it is that you make they kind of want to just know what type of customer you're going to be and so if you have millions and millions of dollars they may try to sell you on some of their wealth building things put that amount in it won't change what actually happens there just get the account made so now the exact same way that you just clicked to make a traditional IRA you're going to do the exact same thing go to open an account and this time click Roth IRA and do that exact same thing open an account within the same platform it'll be easier this time and go way much faster because they already have your details and it's going to be linked so it's probably going to happen in the same day so now that you have the traditional IRA and the Roth IRA opened just think of them kind of like a checking account or savings account it's just an account doesn't need to you don't need to do anything crazy nothing's going to happen to it until you start throwing money into it so what you're going to need to do at this point is just fund your traditional IRA not the Roth IRA the traditional IRA you will have already set up the bank account that's going to be that you're going to be able to wire money from you're going to go in there click Send and you're going to send over let's say three thousand dollars and it'll take like a day or two and then that money will now be in the traditional IRA now what you're doing is you are funding this account with non-tax deductible money and the way that you're going to be able to tell the IRS this is through a form that I'll tell you about later but for now just don't worry you're putting that money in there but it won't be tax deductible so then once you've done that it's actually very simple moving forward you've already done all the hard things so now what you need to do is you need to go to a section that will be able to move money around usually it says transfers and payments or something of that nature you're going to click on that and you're going to set up your transfer now I would do cash only the the difference here is cash is just the money that you put in positions would be if you're invested in something so if you had had your traditional IRA and you invested in the S P 500 then basically what it's saying is do you want to move your position your S P 500 to the Roth IRA we don't want to go that route it gets a little bit crazy with taxes again so that's why I'm telling you just fund the money into the traditional IRA and then we're just going to take the cash from traditional IRA to the Roth IRA so we'll select account we'll say the traditional account here and then you're going to select account to go to and I click my Roth account and now as you can see up here it's trying to say you know watch out because you're doing something with non-tax deductible and tax deductible and make sure you know what you're doing and since you're watching this you do know but I do highly recommend that you check in with a CPA or a financial Pro that you know and just make sure that everything makes sense for you personally don't try to just do this on your own I would definitely talk with somebody but anyway this is the way to do it so it says hey don't do this but oh you could click here to complete this Roth conversion okay cool we're going to do that and then from here they're just saying okay now we can do that so you can select your whatever account it was and we can move it over to the Roth account type of conversion that you'd like a full conversion because we're taking all the cash that's in there and so quick side note here if you're looking at my numbers right here for this traditional Ira you're probably thinking hey isn't this the finance Guru guy has a YouTube channel shouldn't he have more money than that this account is very very old is one of the first things that I ever made and I was going to do a backdoor Roth IRA this year but for 2022 I had sold my business and the problem is that the amount of money that we made from the business sale actually put us in such a high tax bracket that we're trying to do everything we can to take down our taxable income for right now it didn't make sense to contribute to a Roth IRA this last year but for 2023 I'll definitely be contributing so anyway all we're doing is we're taking it from a traditional account to a Roth account it's the full conversion you'd click continue and I'm not going to do that because I'm not going to move this stuff around but you're just going to submit it and then from there that's it you've done the backdoor Roth IRA so now what you've done is you've contributed non-tax deductible money to a traditional IRA move move the money from the traditional IRA to the Roth IRA and that's the back door now one of the last things that you need to do to make sure and convert this whole thing correctly is to make sure that you file the form 8606 this is the form to fill out when you're making a non-tax deductible contribution to a traditional IRA this basically lets the IRS know hey I put that money into that Ira but it was never going to be tax deductible so I didn't do anything wrong no taxes were deducted anywhere I've already paid taxes on this money and so I just moved it over to the Roth and that's completely legal so then the actual last step of this backdoor Roth IRA is actually the first mistake that I see people do all the time with this Roth IRA and what happens is they'll put money in and then say cool it's in there now it's going to grow a whole bunch compound and by the time I'm retired I'm going to be a millionaire and the problem is that when it's put in there it's just a money market it's just like a checking account and it's not invested in anything so at that point what you need to do is you need to invest it in something just like in a brokerage account you put money into the brokerage and then from there you buy shares of apple or Tesla or Vu or something like that so mistake number one that you're not gonna do is you're going to make sure and invest that money the second mistake that I see people do all the time is not remember that this is long-term investing this is literally for your retirement because you can't touch the money until 59 and a half so you need to make investments that are good for long-term sustainable growth some of the best things to invest in are index funds or ETFs that track a broad market like the S P 500 the total stock market index schd or vym for dividends and the last mistake is just not putting as much money as you can afford in right now there's no other investment vehicle that lets you be able to to put money in and then it grows and it compounds and the dividends grow and our Dividends are paid to you in retirement all things totally tax-free so do yourself a favor and definitely get that money into that Roth IRA whatever way you can and start investing in some very solid ETFs and Investments that I lay out in this playlist here that has a bunch of videos that I've done hundreds of hours of research finding the best ETFs out there safest strongest and some of the best for investing long term as always if you have any questions go ahead and throw them in the comment section below and I'll see you on the next one

Channel: Investing Simplified

Views: 30,959

Keywords: backdoor roth ira, backdoor roth ira conversion, backdoor roth ira explained, retirement planning, backdoor roth ira charles schwab, charles scwhab roth ira, individual retirement account, back door roth ira guide, schd, voo, s&P 500 etf voo, what is a backdoor roth, roth ira explained, Retirement planning 2024, Back door roth conversion 2024, Back door Roth IRA 2024, Roth IRA 2024

Id: tz0Srw_jJh8

Length: 12min 22sec (742 seconds)

Published: Sat Jan 14 2023