Tax season is now over, but it’s never too late to look for ways to lower your future tax impact. Taxes are unavoidable. Everyone must pay their fair share, and it can chip away at your financial progress. We work hard to help you avoid paying more than necessary.

Roth IRAs (Individual Retirement Accounts) are government accounts with good tax advantages. They can be a helpful tool to shelter your money from taxes. Here are some tax benefits of Roth IRAs:

1. You invest money you’ve already paid taxes on (this is called “after-tax” money).
2. That money grows over time through your investments with no additional tax.
3. If you’re at least 59 ½ and your account is over five years old, you can take out money in retirement without paying taxes. This includes both your contributions and any growth.
4. Before 59 ½, you can access your Roth IRA money and withdraw your principal, the amount you put in, without penalties or taxes. But you must leave the growth in the account, or you will receive a 10% penalty for early withdrawal and the growth is taxed.

No investment vehicle is perfect. One challenge with a Roth IRA is income limits. If you earn over $236,000 as a married couple or $150,000 as a single filer, the IRS begins to phase you out, and you are unable to contribute to your Roth directly. However, if your income is too high, you can use a workaround called the “backdoor Roth.” Here's how it works:

You start by putting after-tax money into a traditional IRA. Since you're not deducting the contribution, it's called a non-deductible IRA. Then, you quickly move that money into a Roth IRA—ideally within a few days, so it doesn’t grow and create extra taxes. That’s the basic idea of a backdoor Roth: you’re using a traditional IRA as a bridge to get money into a Roth.

A key detail of the backdoor Roth strategy is that you can’t have pre-tax money in other traditional IRAs, SEP, or Simple IRAs when you convert. If you do, the IRS considers all your IRAs as one big account and applies the pro-rata rule. This means only part of your conversion is tax-free. The rest, from your pre-tax IRA dollars, will be taxed.

A backdoor Roth may result in surprise taxes if you hold traditional, SEP, or SIMPLE IRAs with pre-tax money. If your employer allows, one option is to roll your IRAs into a 401(k) or another qualified plan. This step clears the way for a Roth conversion. We don't suggest a backdoor Roth if you can't move your other IRAs into qualified plans. It will create tracking issues for the IRS and your CPA.

We encourage our clients to make a Roth IRA or a backdoor Roth IRA contribution each year. The more they contribute to their Roth today, the less tax they'll owe now and in the future, creating less tax drag on their investments for retirement.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.