A backdoor Roth IRA is a conversion that allows high earners to open a Roth IRA despite IRS-imposed income limits.
Basically, you put money you’ve already paid taxes on in a traditional IRA, then convert your contributed money into a Roth IRA, and you’re done. Even though you didn’t qualify to contribute to a Roth, you get to go in the back door anyway, no matter what your income.
That's good news because your money grows tax-free — and that's a pretty sweet perk when it comes time to take your money out in retirement.
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For 2024, the income limit for Roth IRAs is $161,000 for single filers and $240,000 for married individuals filing jointly. If your income is above the limit, a backdoor Roth might be a good solution for you.
» Learn more:Roth IRA income limits and contribution limits
How to open a backdoor Roth IRA
Here’s a step-by-step guide on how to do a backdoor Roth IRA conversion:
1. Put money in a traditional IRA account. You might already have an account, or you might need to open one and fund it.
» See our list of the best IRA providers
2. Convert your contribution to a Roth IRA. Your IRA administrator will give you the instructions and paperwork. If you don’t already have one, you’ll open a new Roth IRA account during the conversion process. If you'd rather have someone take on this work for you, some financial advisors offer support in handling backdoor Roth conversions for their clients.
3. Prepare to pay taxes. Only post-tax dollars go into Roth IRAs. So if you deducted your traditional IRA contributions and then decide to convert your traditional IRA to a backdoor Roth, you’ll need to give that tax deduction back. When it comes time to file your tax return, be prepared to pay income tax on the money you converted to a Roth. And see below for details on the pro-rata rule, which plays a big part in determining your tax bill.
» Want some help? See our picks for best financial advisors
A rollover, where you receive the money from your traditional IRA and deposit it into the Roth IRA within 60 days.
A trustee-to-trustee transfer, where the traditional IRA provider sends the money directly to your Roth IRA provider.
A "same trustee transfer," where your money goes from the traditional IRA to the Roth at the same financial institution.
There is a pro-rata rule for backdoor Roths
The IRS requires rollovers from traditional IRAs to Roth IRAs to be done pro rata. Here's how it works: When determining your tax bill on a conversion from a traditional IRA to a Roth IRA, the IRS is going to look at all of your traditional IRA accounts combined.
If all of your traditional IRAs combined consist of, say, 70% pre-tax money and 30% after-tax money, that ratio determines what percentage of the money you convert to a Roth is going to be taxable. In this example, no matter how much money you convert or which IRA account you pull the money from, 70% of the amount you convert to the Roth will be taxable. You can't choose to convert only after-tax money; the IRS won't allow it.
And a word about timing: the IRS applies the pro-rata rule to your total IRA balance at year-end, not at the time of conversion.
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Is a backdoor Roth IRA worth it?
Not always. A backdoor Roth IRA may not be a good idea if:
The only way you can pay the taxes due is with money from your IRA withdrawal. Not only are you sacrificing any future investment growth on that money, but there's also the risk that, if you're under age 59-1/2, you'll owe the 10% early withdrawal penalty on that money.
You'll need the money in five years or less. Money converted from an IRA to a Roth IRA falls under a Roth five-year rule: If you don't wait five years to withdraw it, you could owe taxes and a 10% penalty.
The withdrawal from your IRA will push you into a higher income tax bracket. It's generally a good idea to convert just enough that you're not pushed into paying a higher tax rate that year.
» Ready to get started?SeeourpicksforbestRothIRAaccounts
NerdWallet says, "A backdoor Roth IRA is a conversion that allows high earners to open a Roth IRA despite IRS-imposed income limits. Basically, you put money you've already paid taxes on in a traditional IRA, then convert your contributed money into a Roth IRA, and you're done."
A “backdoor” Roth IRA allows high earners to sidestep the Roth IRA's income limits by converting nondeductible traditional IRA contributions to a Roth IRA. That typically requires you to pay income taxes on funds being rolled into the Roth account that have not previously been taxed.
The IRS requires rollovers from traditional IRAs to Roth IRAs to be done pro rata. Here's how it works: When determining your tax bill on a conversion from a traditional IRA to a Roth IRA, the IRS is going to look at all of your traditional IRA accounts combined.
The IRA contribution limits for 2024 are $7,000, with an additional $1,000 catch-up contribution for those who are 50 or over. The other limit that pertains to backdoor Roth IRAs are the income limitations on the ability to contribute directly to a Roth IRA account.
The limits are as follows: For 2023: Between $138,000 and $153,000 for single filers and between $218,000 and $228,000 for joint filers. For 2024: Between $146,000 and $161,000 for single filers and between $230,000 and $240,000 for married couples filing jointly4.
Cons: All or part of a backdoor Roth IRA conversion could be a taxable event. You may have to pay federal, state, and local taxes on converted earnings and deductible contributions. Conversions could kick you into a higher tax bracket for the year.
No, the backdoor Roth is not considered illegal. The IRS does not classify the backdoor Roth as a form of tax evasion but could best be described as a form of tax avoidance. If you have any misgivings about this financial maneuver in a specific situation, you can consult a more experienced tax professional.
A backdoor Roth can be created by first contributing to a traditional IRA and then immediately converting it to a Roth IRA to avoid paying taxes on any earnings or having earnings that put you over the contribution limit.
As long as the taxpayer does not hold any pre-tax IRA funds at the end of the year, a backdoor Roth contribution could be executed without having to worry about the pro-rata rule.
You won't pay double taxes with a backdoor Roth, but you may end up paying some taxes depending on your financial situation. Talk with your financial advisor before making this move to minimize taxes and maximize retirement benefits.
Because a backdoor Roth IRA is categorized as a conversion—not a contribution—you cannot access any of the funds held in the converted Roth IRA without penalty for the first five years after conversion. If you do a backdoor Roth IRA conversion every year, you must wait five years to tap each portion you convert.
Whether it is worth it to do a backdoor Roth IRA depends on your financial situation. If, for example, you are in the 22% federal marginal income tax bracket (or under), you should do a Roth IRA to diversify your retirement funds. If your federal income tax bracket reaches 24%, you are at a neutral state, more or less.
In November 2021, the U.S. House of Representatives approved a measure that would have closed the backdoor Roth loophole, but the legislation has stalled in the Senate. For now, the backdoor remains open, but it may not always stay that way.
"Backdoor Roth IRA" is simply a term to describe a strategy used by high-income earners who can't contribute to a Roth IRA because their income is above certain limits. Rather than contribute directly to a Roth, you contribute to a traditional IRA, and then convert it to a Roth.
The tax requirements for a backdoor Roth IRA involve reporting nondeductible contributions to a traditional IRA and subsequent conversions to a Roth IRA on Form 8606. Failing to do so, could cost you more money in IRS penalties and additional taxes on the converted amount.
A mega backdoor Roth allows high-earning investors — who otherwise couldn't put money in a Roth account because of income or contribution restrictions — to move money from a 401(k) plan to a Roth IRA or Roth 401(k) plan.
The Roth IRA five-year rule says you cannot withdraw earnings tax-free until it's been at least five years since you first contributed to a Roth IRA account. This five-year rule applies to everyone who contributes to a Roth IRA, whether they're 59 ½ or 105 years old.
High-income earners aren't permitted to contribute directly to a Roth IRA but they can still make contributions indirectly thanks to a tax loophole known as the backdoor Roth IRA.
Whether it is worth it to do a backdoor Roth IRA depends on your financial situation. If, for example, you are in the 22% federal marginal income tax bracket (or under), you should do a Roth IRA to diversify your retirement funds. If your federal income tax bracket reaches 24%, you are at a neutral state, more or less.
The point of a Roth IRA is that it's already taxed money that grows tax-free. So, to convert your traditional IRA to a Roth IRA you'll have to pay ordinary income taxes on your traditional IRA contributions in the year of the conversion before they “count” as Roth IRA funds.
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