The Backdoor Roth IRA in a Nutshell

Insights from experienced financial professionals.

If you are wondering what in the world a “backdoor Roth IRA” is, you're not alone! In short, if you've been frustrated by the contribution limits associated with Roth IRAs, then read on - this article describes a strategy that is designed to help.

We all know that the IRS imposes annual contribution limits for both traditional and Roth IRAs. For most people, that limit is currently set at $6,000 ($7,000 if you're age 50 or older) 1, but if your income is high (as in 'healthily into six figures' high) your permitted Roth contribution may be reduced or eliminated altogether. The calculations for determining those limits are a bit complicated and involve your modified adjusted gross income (MAGI), tax filing status, and more. This page on the IRS site provides all the details.

The backdoor Roth IRA is an IRS-sanctioned strategy that involves converting a traditional IRA or 401(k) account (which are not subject to income-determined contribution limits) to a Roth IRA as a legal workaround for high earners whose income would normally prohibit Roth contributions.

Some key points to keep in mind about the backdoor Roth IRA strategy:

  • Only one Roth IRA conversion is permitted per year.

  • You'll still pay taxes on the funds in the year they convert, but the end result will be a Roth IRA account.

  • Funds deposited to a Roth in this manner count as converted funds rather than contributions, meaning that for five years you'll be subject to penalties if you make withdrawals prior to age 59½.

  • Roth IRA conversions are not subject to the current $6,000/year ($7,000 if you're age 50 or older) contribution limits.

  • It's often advisable to convert a traditional IRA established for the conversion immediately. If you accumulate gains in your traditional IRA before conversion, you'll likely have to pay taxes on those gains as well.

Creating a backdoor Roth IRA

There are several common ways to implement this strategy, including:

  1. Contribute money to a new traditional IRA account and then roll the funds over to a Roth IRA.

  2. Roll over a portion of an existing traditional IRA account into a Roth. As mentioned above, this can be any amount, even if that amount exceeds the annual contribution limit.

  3. Similarly, you can convert an entire traditional IRA account to a Roth IRA account.

  4. Make an after-tax contribution to a 401(k) plan and roll it over to a Roth IRA.

In each of these instances keep in mind that you'll generally have to pay taxes on any contributions or earnings rolled into a Roth IRA account if they haven't been taxed before.

Backdoor Roth IRAs can be a valuable strategy for high earners who generally can't make Roth contributions, for those who value future tax-free growth, or for avoiding required minimum distributions down the road. But… they can be complicated to implement. We'd love to help you explore the possibilities and map out a plan if you feel that a backdoor Roth IRA could play a valuable role in your retirement portfolio.

Looking for assistance? We're here to help. Contact Us for general questions or Schedule an Appointment with a financial advisor.



Important Disclosures: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

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