The Roth IRA is an individual retirement savings account that gives you a lot of benefits. While most people who work can’t directly contribute to a Roth IRA because they have too much unmodified AGI, self-employed individuals are an exception. This article details the benefits of contributing to a Roth IRA if you’re self-employed. Self-employment comes with some drawbacks, including not being able to access many traditional employee benefits such as company stock or 401(k) retirement plans. However, being your own boss also has its advantages, and one of those is the ability to contribute to a Roth IRA. Although it might seem like there are no clear benefits from putting money into such an account when you’re not in an employee role, the truth is that being your own boss makes it easier to contribute to your own personal Roth IRA.
A Roth IRA is a retirement savings account that allows you to set aside money and earn interest on it tax-free. This means that, unlike with most other retirement accounts, you won’t have to pay taxes on withdrawals from your Roth IRA when you retire. Roth IRAs are available to people with a few different types of tax-qualified income, including self-employed individuals. There are a few different types of Roth IRAs. Still, the most common are Roth IRA contributions and Roth IRA conversions. The former is for anyone with taxable income, while the latter is for people who’ve already saved up a lot in a Traditional IRA and need to move that money to a Roth IRA without paying taxes. There are also a few Roth IRA income restrictions, including Roth IRA eligibility for the self-employed.
Roth IRAs don’t have income restrictions; they have contribution limits. In 2019, anyone under the age of 70 and a half can contribute up to $6,000 to a Roth IRA, while those who are 50 and older can contribute $7,000. These contribution limits are in place to ensure that everyone can benefit from Roth IRAs, even if they don’t make a lot of money. For example, a person who earns $35,000 a year could put away $6,000 in a Roth IRA and pay no taxes on their contributions. Meanwhile, a person earning $250,000 a year could also put away $6,000 in a Roth IRA and pay no taxes on that money.
- You have more control over your retirement savings: When you’re an employee, your company typically manages your retirement savings in a 401(k) plan. This is convenient, but it also means you have no control over your retirement savings and your investment choices. Contribution to a backdoor Roth IRA allows you to take control of your retirement savings and make sure you’re putting enough money away for retirement.
- You can get a head start on your retirement savings: If you start saving for retirement early, you have more time to earn interest and increase your savings. This means that if you’re self-employed, contributing to a Roth IRA gives you a head start on retirement savings.
- You don’t have to worry about Roth IRA income restrictions: While most people earn too much to contribute directly to a Roth IRA, self-employed individuals don’t have this problem.
- You have to pay taxes on your contributions now: Unlike with a Traditional IRA, where you put money away now and pay taxes when you withdraw it, you have to pay taxes on every dollar you contribute to your backdoor Roth IRA. This means that self-employed individuals who contribute to their Roth IRA will probably end up with a higher tax bill in the short term.
- It’s a lot of paperwork: Contribution to a Roth IRA is a multi-step process that requires lots of paperwork. You have to fill out a form called a Roth IRA conversion notice, have your financial institution issue you a Roth IRA account, and then fill out a form called a Roth IRA contribution election.
First, you’ll need to make sure you’re eligible to contribute to a Roth IRA. This means that you must have taxable income that falls within the Roth IRA contribution limit (which is $6,000 in 2019 if you’re under the age of 70 and a half and $7,000 if you’re 50 or older). If you do, you can make contributions to a Roth IRA in one of two ways:
- Contribute to a Traditional IRA and then convert it to a Roth IRA: You can make contributions to a Traditional IRA and then convert it to a Roth IRA if you have a high income. The process is the same as contributing to a Roth IRA directly, but the key difference is that you pay taxes on the money when you convert it.
- Contribute to a Roth IRA directly: You can also contribute to a Roth IRA directly if you have a low enough income. However, this means you pay taxes on the money now instead of when you withdraw from the account.
If you meet the income requirements to contribute to a Roth IRA but don’t qualify to open one, you can still make the most of your backdoor Roth IRA. Roth IRAs are just one type of retirement account available to American taxpayers. Traditional IRAs and other retirement vehicles, such as a 401k. Suppose you don’t have another retirement account and still want to maximize your retirement savings with a Roth IRA. In that case, you can turn your Roth IRA into a Traditional IRA. There are a few ways to do this, including:
- Converting your Roth IRA to a Traditional IRA: You can make a Roth IRA conversion by opening a Traditional IRA and then converting it to a Roth IRA. This option is available for those who have only one retirement account and want to add a Roth IRA to their retirement portfolio.
- Recharacterizing your Roth IRA to a Traditional IRA: If you’ve already opened a Roth IRA and want to make a conversion, you can recharacterize your Roth IRA to a Traditional IRA. This is a good option for those who’ve already converted their Roth IRA to a Traditional IRA and want to go back to a Roth IRA.
- Rollover your Roth IRA to a Traditional IRA: If you’ve already opened a Traditional IRA, you can roll over your Roth IRA to your Traditional IRA. This allows you to diversify your retirement portfolio and have more control over your retirement savings.
Suppose you’ve met the income requirements to contribute to a Roth IRA and converted it to a Traditional IRA. In that case, you may be wondering when you can withdraw from your Traditional IRA. A Roth IRA and Traditional IRA are different retirement accounts, which means they have different withdrawal rules. The Roth IRA has a more lenient withdrawal rule and allows you to withdraw from your Roth IRA at any time after you turn 59.5 years old. On the other hand, a Traditional IRA has an earlier withdrawal rule. It lets you withdraw from your account once you reach the age of 59.
Contributing to a backdoor Roth IRA is a great way for self-employed individuals to take control of their retirement savings. It’s important, though, to make sure you follow all the rules related to Roth IRA contributions and don’t exceed the annual contribution limit. All in all, contributing to a Roth IRA is a great way to ensure a financially secure retirement and a happy future for you and your family.