How to Backdoor a Roth IRA (and When to Do It)
If your income exceeds the limits for direct contributions to a Roth IRA , there is still a way to fund it through a strategy known as a “backdoor Roth IRA.” This method allows high-income individuals to take advantage of the tax-free growth and tax-free withdrawals offered by a Roth IRA.
What is a Back Door Roth IRA?
A backdoor Roth IRA is not a formal account type: it is simply a strategic maneuver that involves making contributions to a traditional IRA and then converting those funds to a Roth IRA. This bypasses income restrictions that typically prevent high-income individuals from contributing directly to a Roth fund.
If you file your tax return as a single person, your modified adjusted gross income (MAGI) must be less than $153,000 for the 2023 tax year and $161,000 for the 2024 tax year to contribute to a Roth IRA, and if you have a married and filing a joint return, your MAGI must be less than $228,000 for the 2023 tax year and $240,000 for the 2024 tax year.
How a Backdoor Roth IRA Works
Here are the basics of using this backdoor strategy:
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Make a nondeductible contribution to a traditional IRA. Since your income exceeds the Roth IRA limits, you can contribute to a traditional IRA without taking a tax deduction.
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Convert a traditional IRA to a Roth IRA. After you contribute to a traditional IRA, you can convert those funds to a Roth IRA. This conversion is a taxable event, but since you did not receive a tax deduction on the contribution, you will only pay taxes on any income.
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Pay taxes on conversion. When you convert, you’ll owe income taxes on any earnings in the traditional IRA account. If the conversion occurs quickly after the contribution is made, there likely will be no significant taxable gain.
IRA Eligibility and Limitations
There are no income limits for contributing to a traditional IRA or converting to a Roth IRA. The annual IRA contribution limit is $7,000 in 2024 (up from $6,500 in 2023). Remember, these contribution limits apply to the total amount of contributions you make each year to all of your traditional and Roth IRAs. As always, you can and should exceed these limits as much as possible if possible.
It’s important to note that if you have pre-tax funds in other traditional IRAs, the conversion will be partially taxed based on the pro rata rule.
Getting Started with a Backdoor Roth IRA
To set up a backdoor Roth IRA, you’ll need to open a traditional IRA account if you don’t already have one. Then make your deductible contribution and begin the Roth conversion process as required by your provider.
It’s a good idea to consult with a tax professional , especially if you have IRA funds, to make sure you understand the tax consequences. Although the backdoor Roth strategy involves some extra steps, it can be a valuable way for high-income individuals to take advantage of the benefits of a Roth IRA.