Backdoor Roth IRA

By Sunwook Jin, CFP®, CRPC®, CMFC®

If you’ve been told or learned that you can’t contribute to a Roth IRA because you make too much money, it may be time for you to consider converting some or all of your Traditional IRA to a Roth IRA.  However, before you do… understand the tax implications.

The concept isn’t new. When the government raised the income limits (from $100,000 to unlimited) on eligibility for Roth conversions in 2010, higher-income taxpayers are able to contribute to a nondeductible Traditional IRA and then convert it to a Roth IRA a sometime thereafter.

If you are married filing a tax return jointly with income greater than $199,000 in 2018 (see other Roth IRA Income Limits), your are disqualified altogether from contributing to a Roth IRA.  However, you can make a nondeductible contribution to a traditional IRA and subsequently convert it to a Roth IRA in order to obtain the ability to make tax-advantaged withdrawals (Tax-Free when it’s qualified withdrawals) from the account during retirement years.

Keep in mind that if you have multiple Traditional IRAs, you must aggregate all of your Traditional IRAs as one (including SEP IRAs and SIMPLE IRAs).  Fortunately, 401(k) accounts are not subject to the aggregation rule.

So, to summarize, here are the steps for implementing the backdoor Roth conversion strategy:

  1. Max out the annual contributions to a Traditional IRA.
  2. Convert some or all of your Traditional IRA to the Roth IRA.

When implemented properly, you could have tens or even hundreds of thousands of extra dollars in these assets that accumulate tax-free and provide nontaxable income in retirement.

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