2b:["$","$L2c",null,{"category":"$2d","relatedArticles":[{"id":"cG9zdDoyMzYwNzU=","databaseId":236075,"postId":236075,"author":{"node":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/72c05cde57f4d7ee65af27e91a5315c2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":{"pageInfo":{"offsetPagination":{"total":907,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ereed","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTUwOA==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19508,"categoryId":19508,"link":"https://smartasset.com/tax-credits-deductions/articles","name":"Tax Credits & Deductions","postCount":{"pageInfo":{"offsetPagination":{"total":87,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"tax-credits-deductions","ancestors":{"nodes":[{"name":"Taxes","slug":"taxes","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Taxes","id":"dGVybToxMzY=","slug":"taxes","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$2e","date":"2024-02-19T17:55:12","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyMzgyOTQ=","databaseId":238294,"altText":"A woman meeting with a financial advisor to review which medical expenses she could itemize to claim a deduction.","date":"2024-02-19T17:50:12","fileSize":243511,"mimeType":"image/jpeg","modified":"2024-02-19T17:51:49","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/02/iStock-1327911114.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-2-19","readable":"February 19, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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Taxpayers can deduct medical expenses by itemizing them on their taxes. However, these deductions may be out of your reach as the current standard deduction is high. In 2024, the standard deduction is $14,600 for individuals and $29,200 for joint filers. Therefore, taxpayers generally itemize deductions if the total amount is greater than the standard deduction. If you itemize deductions, and you have unreimbursed expenses for necessary medical or dental care, you may be able to claim a tax deduction if they exceed 7.5% of your adjusted gross income. Here are five expenses you may be able to deduct.

","

A financial advisor can help you optimize your financial plan to lower your tax liability.

","

When Can You Deduct Medical Expenses?

","

In some cases, the IRS allows you to deduct medical costs, including dental expenses, from your taxes. In general, the following rules apply to any deduction you want to claim:

","

You must itemize your taxes, not take the standard deduction
The spending must have been on treatment for you, your spouse or your dependents
You can only deduct spending to the extent the expenses exceeded 7.5% of your AGI
The spending must have been unreimbursed by insurance or any other program
You must have spent the money yourself
In most cases, the treatment must be necessary rather than optional or cosmetic

","

The personal spending requirement means that you cannot claim a deduction for payments made on your behalf. And the deduction only applies to spending above the cap. For example, say that you make $100,000 in taxable income and have $10,000 in combined medical expenses. You cannot deduct the first $7,500 (7.5% * $100,000) but you can deduct the remaining $2,500 in spending.

","

Households with very significant medical bills may get more value from itemized medical deductions than the standard deduction. If you would like to check whether you can deduct your medical expenses, the IRS offers an interactive assistant. Here are five medical expenses the that the agency allows to deduct:

","

Health Insurance Premiums

","

Qualifying taxpayers can deduct the monthly premiums that they pay for insurance coverage. These include expenses to HMOs, long-term care insurance and Medicaid payments.

","

Not all insurance will qualify for this tax deduction, so make sure that your coverage does. It also applies to dental insurance, which can often be more expensive than medical coverage.

","

Dental Treatment

","

Even when you have dental insurance, it frequently doesn’t offer the same kind of comprehensive coverage as medical insurance. Often dental insurance simply reduces or restructures how you pay for treatment. As a result, even among individuals with insurance it’s common to pay significant out-of-pocket expenses for dental treatment.

","

This spending is tax deductible if you meet the general rules for medical deductions. That can include spending on cleanings, X-rays, fillings, braces and other treatments, but not for cosmetic processes like teeth whitening.

","

Medical Treatment Fees

","

Whether you see a private practitioner, a psychologist, a chiropractor, a surgeon, a specialist, or other form of medical practitioner, you can take a qualified deduction for treatment fees.

","

This deduction also can apply to nontraditional practitioners such as acupuncturists. It applies more broadly as well to treatment at rehabilitation centers, weight loss programs and cessation treatment for drugs, alcohol and smoking.

","

Finally, you can deduct the fees you pay for treatment at medical facilities. For example, a qualifying taxpayer can deduct their expenses for hospital care or a stay in a nursing home. This deduction can include all of your costs of care, not just direct medical treatment. For example, you can deduct the costs of food and lodging during a hospital stay.

","

Prescription Drugs

","

After treatment, a patient may need to pay out of pocket for insulin and other prescription drugs. So long as you meet the qualifications, and the drugs are considered necessary rather than cosmetic or otherwise optional, this spending is tax deductible.

","

As with dental treatment, this is a common source of significant expenses since insurance often will not fully cover drug costs.

","

Medical Aids and Devices

","

Medical devices are in a broad category, and you can deduct qualified spending within it.

","

While medical devices generally apply to urgent care, such as pacemakers and oxygen tanks, it can also refer to much more common spending as well. For example, you can deduct expenses for eyeglasses, contact lenses, hearing aids, crutches, wheelchairs and service animals.

","

For most households, if you itemize your taxes, there’s a good chance that you will have some medical device spending to claim.

","

Bottom Line

","

\"An — Focused young Caucasian male employee sit at desk at home office work on computer reading paperwork. Concentrated man worker busy using laptop consider financial documents at workplace.

","

Most forms of medical spending, from insurance premiums to treatment, are tax deductible if you meet the IRS’ requirements. To claim this deduction you must take itemized deductions rather than the standard deduction and must have spent more than 7.5% of your income on qualified medical bills.

","

Medical Savings Tips

","$45","

Photo credit: ©iStock.com/Igor Alecsander, ©iStock.com/fizkes

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\n","featuredImage":{"id":"cG9zdDoyNDE3MjU=","databaseId":241725,"altText":"The money you get from a reverse mortgage is a loan, not enrichment. As a result, you do not owe any taxes on it.","date":"2024-03-18T18:02:07","fileSize":228556,"mimeType":"image/jpeg","modified":"2024-03-18T18:02:55","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/03/iStock-687018210.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-3-18","readable":"March 18, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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A reverse mortgage can be a useful way to access the value of your home without having to sell it. This is a form of lending intended for, and typically restricted to, older households. That said, it’s important to be very careful with this product. Reverse mortgages are more complicated than frequently advertised, and could be used as a vehicle for scams and predatory lending. However, the good news is that a reverse mortgage is simple from a tax standpoint. The money you get from a reverse mortgage is a loan, not enrichment. As a result, you do not owe any taxes on it. And, when you or your estate repays this loan, you might receive a deduction for the interest provided that you spent this money improving the property. Here’s what you need to know.

","

Before you take a reverse mortgage, it may be worth consulting a financial advisors to determine if this is a good fit for your financial needs.

","

What Is a Reverse Mortgage?

","

A reverse mortgage is a specialized form of home loan designed for retirees and seniors. With a reverse mortgage, you receive a loan based on the equity you have in your house. Equity is defined as the home’s value, generally determined by sale price, bank assessment, or property tax assessment, less any amount you currently owe. For example, say that you have a house valued at $500,000 on which you still owe $100,000. You would have $400,000 of equity in this house.

","

When you take a reverse mortgage, the lender gives you a loan based on this home equity. In exchange, they receive a claim on your house up to the value of the loan. The loan will also include an interest rate, a compounding schedule and, typically, origination fees. There are typically three types of reverse mortgages:

","

Lump sum. You receive a single payment all at once up to the equity value. For example, if you have $400,000 worth of equity in your home, the lender might give you $360,000 (90% of your equity).

","

Line of credit. You can borrow up to the value of your home at any given time, in the same way a credit card operates. For example, if you have $400,000 worth of equity in your home, you might borrow freely as long as the account balance is below $360,000.

","

Structured payments. You receive a series of payments over time equaling the value of your home. For example, if you have $400,000 worth of equity in your home you might receive $1,200 per month for the next 25 years ($1,200 x 12 x 25 = $360,000)

","

Typically to receive a reverse mortgage you must be age 62 or older. This is a requirement of the Department of Housing and Urban Development, which secures most reverse mortgages.

","

Unlike most loans, you do not make regular payments on a reverse mortgage. The debt will grow over time as the lender compounds interest against your current balance, typically on a monthly basis. You then pay the loan all at once at the end of the loan period. While in some cases this can be a pre-defined amount of time, with most reverse mortgages you repay the loan either if you move out of the house for any reason (including medical care) or at your death (in which case your estate will make payment).

","

The loan is secured by your house itself. The lender receives an interest in the home, in the same way that the lender has an interest in the house with a standard mortgage. When the loan is due, you can either make payment in cash or the lender receives title to the house.

","

As a result, a reverse mortgage lender will require you to keep the house in good condition and to stay current on all property taxes. This is often a way for predatory lenders to take advantage of borrowers. Bad actors will claim that the house has fallen into disrepair or make other escalating demands to try and manufacture a default and seize the property.

","

Reverse Mortgage Tax Implications

","

","

A reverse mortgage has little impact on your taxes. You do not pay taxes on the money you receive from a reverse mortgage. Since this is a loan, a reverse mortgage does not increase your wealth. You repay the principal, and then pay the lender in the form of interest and fees. (In fact, like all interest-bearing loans, the borrowing itself makes you poorer.) As a result, there is no taxable event involved with receiving the money from a reverse mortgage.

","

For the same reason, a reverse mortgage does not impact your other income taxes, nor does it affect your Social Security, Medicare or any benefits associated with your taxable income. This is because a reverse mortgage is not included in your taxable income. However, a reverse mortgage can affect means-tested programs that measure your available assets, such as Medicaid. If you have cash on hand from a reverse mortgage, a means-tested program may include that cash as part of your assets regardless of the associated debt.

","

If, for some reason, your lender forgives this loan then the IRS would likely consider this a tax event. This has to do with the structure of all loans, which are considered income in the year they are forgiven, and is not unique to a reverse mortgage.

","

When you repay the loan on a reverse mortgage, or when your estate does so, in some unusual cases you might be able to deduct the interest paid on this debt. You cannot take this deduction until you pay the loan, and it is limited only to taxpayers who itemize their deductions. You also can only deduct portions of the loan that you used to substantially improve the property, because the IRS considers this a home equity loan. As a result, this is an unusual deduction, since most households use a reverse mortgage for income replacement.

","

Bottom Line

","

","

A reverse mortgage has no significant tax implications for most households. You do not pay taxes on the proceeds of this loan, as borrowed funds do not increase your wealth. You can deduct interest payments if you itemize your taxes, but only to the extent that you used the reverse mortgage funds to substantially improve the property.

","

Retirement Cash Management Tips

","$58","

Photo credit: ©iStock.com/fstop123, ©iStock.com/designer491, ©iStock.com/shapecharge

"],"experts":null,"link":"/tax-policy/reverse-mortgage-tax-implications","published":{"datetime":"2024-3-18","readable":"March 18, 2024"},"shareInfo":{"title":"Tax Implications for Reverse Mortgages","origin":"/taxes/reverse-mortgage-tax-implications"},"isNewsArticle":false},{"id":"cG9zdDoyNjY1ODU=","databaseId":266585,"postId":266585,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1417,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTUwNg==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19506,"categoryId":19506,"link":"https://smartasset.com/tax-planning/articles","name":"Tax Planning","postCount":{"pageInfo":{"offsetPagination":{"total":93,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"tax-planning","ancestors":{"nodes":[{"name":"Taxes","slug":"taxes","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Taxes","id":"dGVybToxMzY=","slug":"taxes","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$59","date":"2024-10-27T18:30:06","excerpt":"

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A liquidating dividend, unlike regular dividends that are paid from a company’s profits, is distributed from the company’s capital base during the process of winding down operations or liquidating assets. This dividend returns part of the investor’s original investment rather than a portion of earnings. Liquidating dividends are taxed differently from regular dividends, as they are generally treated as a return of capital rather than income .The investor may have a capital gain or loss depending on the amount they receive when compared with their basis.

","

A financial advisor can help you assess the tax implications of an investment, advise on reinvestment options and determine potential capital gains or losses.

","

How a Liquidating Dividend Works

","

A liquidating dividend is a type of payment made by a corporation to its shareholders during the process of dissolving its business.

","

Unlike regular dividends, which are paid from a company’s profits, liquidating dividends are distributed from the company’s capital base. This occurs when a company closes its operations and returns its assets to shareholders. Often, this type of dividend is seen as a return of the shareholder’s original investment rather than a profit.

","

The liquidation process begins with the decision to dissolve the company, which can be voluntary or involuntary. In a voluntary liquidation, the company’s management and shareholders agree to cease operations, often due to unprofitability or strategic shifts. Involuntary liquidation, on the other hand, is typically initiated by creditors when a company cannot meet its financial obligations.

","

Once the decision is made, the company sells its assets, pays off its liabilities and distributes any remaining funds to shareholders in the form of liquidating dividends. This ensures that all financial obligations are met before any distributions are made to shareholders.

","

Investors should note that the timing of dividend liquidation can also affect their tax situation, as they might face a higher tax bill if their income pushes them into a higher tax bracket. Spreading out dividend liquidation over multiple years, however, could help them manage their tax liability more effectively.

","

Impacts of Liquidating Dividends for Investors and Companies

","

","

Liquidating dividends can be a strategic financial decision for companies and investors alike. While liquidating dividends can offer immediate financial benefits to shareholders, they also come with potential drawbacks, such as tax implications and a reduction in company assets. Here are five things to consider:

","

Immediate cash flow for shareholders: Liquidating dividends provide shareholders with immediate cash, which can be particularly beneficial during times of financial need or economic uncertainty. This immediate cash flow can be used for reinvestment, personal expenses or other financial opportunities.

","

Potential tax implications: Receiving liquidating dividends may have tax consequences, as they are often taxed differently than regular dividends. Investors should consult with a tax advisor to understand how these dividends will impact their tax situation and plan accordingly.

","

Reduction in company assets: When a company issues liquidating dividends, it reduces its asset base, which can impact its long-term growth potential. This reduction may lead to a decrease in the company’s ability to invest in future projects or expand its operations.

","

Signal of company restructuring or dissolution: Liquidating dividends can indicate that a company is undergoing restructuring or is in the process of winding down operations. Investors should be cautious and investigate the reasons behind the issuance of liquidating dividends to assess the company’s future viability.
Impact on stock price: The issuance of liquidating dividends can affect a company’s stock price, often leading to a decline as the market perceives a reduction in the company’s value. Investors should monitor stock performance and market reactions when liquidating dividends are announced.

","

Bottom Line

","

","

For investors, liquidating dividends are issued when a company returns capital during dissolution or restructuring. These dividends distribute a company’s assets to shareholders and reduce their investment as they’re paid from the company’s capital base rather than profits. Unlike regular dividends, liquidating dividends have specific tax implications, which investors should factor into their tax planning.

","

Investment Planning Tips

","$70","

"],"experts":null,"link":"/tax-planning/liquidating-dividend","published":{"datetime":"2024-10-27","readable":"October 27, 2024"},"shareInfo":{"title":"What Is a Liquidating Dividend and How Are They Taxed?","origin":"/taxes/liquidating-dividend"},"isNewsArticle":true},{"id":"cG9zdDoyNTQzMzE=","databaseId":254331,"postId":254331,"author":{"node":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":776,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxMzY=","children":{"nodes":[{"name":"Other","slug":"other-taxes","__typename":"Category"},{"name":"Tax Credits & Deductions","slug":"tax-credits-deductions","__typename":"Category"},{"name":"Tax Filing","slug":"tax-filing","__typename":"Category"},{"name":"Tax Planning","slug":"tax-planning","__typename":"Category"},{"name":"Tax Policy","slug":"tax-policy","__typename":"Category"}],"__typename":"CategoryToCategoryConnection"},"databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":{"pageInfo":{"offsetPagination":{"total":224,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$71","date":"2024-10-22T08:02:43","excerpt":"

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If you’re making $275,000 a year, you can’t contribute to a Roth IRA due to income limits. However, a backdoor conversion can allow a high earner to sock away unlimited sums in a Roth account, enabling tax-free requirement withdrawals and a way past pesky required minimum distribution rules (RMDs) that many pretax retirement account require. But this will likely require sufficient after-tax funds — such as from a non-retirement bank account or brokerage account — to pay the upfront tax bill that a backdoor conversion strategy generates.

","

Conversions are most advisable for savers who will be in a higher tax bracket after retirement. Assuming these conditions are met, a backdoor conversion can be a useful method of avoiding Required Minimum Distributions (RMDs) and enjoying tax-free withdrawals in retirement. Consider discussing a Roth backdoor conversion with a financial advisor to make sure you understand the ins and outs of this strategy.

","

Backdoor Basics

","

Roth retirement accounts allow savers to use after-tax money to fund accounts where investments accumulate earnings tax-free and, in most circumstances, withdrawals are also tax-free. Another appealing feature of Roth accounts is that they are exempt from RMD rules requiring savers to begin withdrawing from pre-tax savings accounts such as IRAs and 401(k)s after age 73, which can expose retirees to unwelcome tax bills.

","

Roth IRAs also have income limits that make them inaccessible to some high earners. For 2024, individuals earning $161,000, married couples filing jointly earning $240,000 and married couples filing separately earning $10,000 are all prohibited from contributing to Roth retirement accounts at all.

","

However, since 2010 it’s been possible for a saver to convert unlimited funds from a pre-tax retirement account to a Roth account. This backdoor conversion, as it’s known, has become a popular way for people who earn and lot and have saved a lot to get the advantages of Roth accounts.

","

To perform a backdoor conversion, a saver can transfer funds from a pre-tax retirement account such as a 401(k). 401(k)s and other qualified accounts may not limit an investor based on his or her income, and its annual contribution limits are also much higher than Roth IRA contribution caps. Next, they transfer funds from their other retirement account to a new Roth IRA account. Because the funds from the 401(k) are pre-tax, the saver will have to pay income taxes on the converted amounts in that tax year, as if they were withdrawals treated as ordinary income. A large transfer can generate a large tax bill if the entire amount is converted at once. Sometimes conversions of large IRAs are done gradually over several years to manage the tax bill and keep the person in lower tax brackets.

","

After conversion, the funds in the Roth account can grow tax-free and later be withdrawn tax-free, in most cases, in addition to being free from RMDs. There are no restrictions on how much money can be converted at once or on how often conversions are done, so it’s possible to move very large sums through the backdoor process.

","

Consider using this free tool to match with fiduciary financial advisors and discuss your tax strategy.

","

Backdoor Limitations

","

Backdoor conversions solve some problems but may not suit every saver. The major issue is the tax bill that comes due when the conversion is completed. It’s preferable to have sufficient funds to pay this bill in after-tax brokerage or bank accounts, so funds in the retirement account can continue to grow tax-free. Using retirement funds to pay the taxes due can dampen long-term accumulation in the accounts.

","

Another consideration is that backdoor conversions may be less fruitful if a saver if very close to retirement. Specifically, the five-year rule may prevent someone from accessing that money within five years of it being converted.

","

Finally, a backdoor conversion may not be a good idea at all if a saver expects to be in a lower tax bracket after retirement. In this case, it would save money to leave funds in a pre-tax account where they can grow tax-free and withdraw them later when the tax bill will be lower. Remember, a financial advisor can help you determine the right strategy for your goals.

","

Bottom Line

","

For someone earning $275,000 a year, a backdoor conversion is the only way to save for retirement using a Roth IRA. The strategy involves paying taxes now, but allows for tax-free future growth as well as tax-free withdrawals and immunity from RMD rules. There are no income limits for backdoor conversions, and the strategy can be employed as many times as desired. Conversions aren’t always best for savers who will be in lower tax brackets after retirement, and other restrictions may apply. But the strategy is popular for higher-income earners who want the benefits of having funds in a Roth IRA.

","

Tips

","$83","

"],"experts":{"name":"Jennifer Mansfield, CPA","topic":"Taxes","bio":"Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice.","imageUrl":"https://d31s10tn3clc14.cloudfront.net/imgs/jennifer-mansfield.png","email":"jmansfield@smartasset.com"},"link":"/taxes/making-275k-backdoor-roth-reduce-taxes","published":{"datetime":"2024-10-22","readable":"October 22, 2024"},"shareInfo":{"title":"I’m Earning $275k This Year. Can I Use a Backdoor Roth Strategy to Reduce Taxes?","origin":"/taxes/making-275k-backdoor-roth-reduce-taxes"},"isNewsArticle":true}]}]