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Enter a Roth through the back door

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in Small Business Tax,Small Business Tax Deduction Strategies

A Roth IRA can provide tax-free payouts to retirement-savers in the future. But you may not be able to make annual contributions to a Roth due to the tax law limits. Plus, if you convert funds in a traditional IRA to a Roth IRA, you’ll have to pay a hefty tax price.

Strategy: Go in the “back door” instead. Set up a traditional IRA funded with nondeductible contributions. Then convert the traditional IRA into a Roth.

Is it legal? Absolutely. The maximum annual amount you’re allowed to contribute to IRAs in 2014—including any combination of traditional and Roth IRAs—is limited to $5,500 for ($6,500 if you’re age 50 or older). But there’s nothing to stop you from maximizing the back-door approach in multiple years to build up a sizable nest egg.

Here’s the whole story: If a Roth has been in existence at least five years, “qualified distributions,” like those made after age 59½, are 100% exempt from income tax. Furthermore, othe...(register to read more)

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