The backdoor Roth IRA is a strategy that allows individuals to contribute to a Roth IRA even if they exceed the income limits for direct contributions. This strategy involves making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA.
Legality and IRS Recognition
The backdoor Roth IRA is a legal and recognized strategy by the Internal Revenue Service (IRS). It does not violate any tax laws or regulations. The IRS has specifically stated that the backdoor Roth IRA is permissible as long as the individual meets the eligibility requirements and follows the proper steps.
Eligibility Requirements
To be eligible for a backdoor Roth IRA, you must:
- Have earned income
- Not be able to make direct contributions to a Roth IRA due to income limits
- Have a traditional IRA or be willing to open one
Contribution Limits
The contribution limits for a backdoor Roth IRA are the same as the limits for traditional IRAs. For 2024, the contribution limit is $6,500 ($7,500 for individuals age 50 or older).
Income Limits
The income limits for direct Roth IRA contributions are as follows:
- Single: $144,000 ($214,000 for those who are married filing jointly)
- Married filing separately: $10,000
If your income exceeds these limits, you cannot make direct contributions to a Roth IRA. However, you can still use the backdoor Roth IRA strategy.
Steps to Perform a Backdoor Roth IRA
To perform a backdoor Roth IRA, follow these steps:
- Make a non-deductible contribution to a traditional IRA.
- Convert the non-deductible contribution to a Roth IRA.
- Pay taxes on any earnings that have accumulated in the traditional IRA.
Tax Implications
The tax implications of a backdoor Roth IRA depend on whether you have any pre-tax money in your traditional IRA. If you do, you will need to pay taxes on the earnings that have accumulated on the pre-tax money when you convert it to a Roth IRA.
Benefits of a Backdoor Roth IRA
There are several benefits to using a backdoor Roth IRA:
- Allows individuals to contribute to a Roth IRA even if they exceed the income limits
- Provides tax-free growth potential
- Offers tax-free withdrawals in retirement
The backdoor Roth IRA is a valuable strategy for individuals who want to save for retirement but cannot make direct contributions to a Roth IRA due to income limits. It is a legal and recognized strategy that offers several benefits. However, it is important to understand the eligibility requirements, contribution limits, and tax implications before using this strategy.
ROTH IRA INCOME LIMITS REMOVED | How to do a Backdoor Roth IRA Step-by-Step Tutorial
FAQ
Is the backdoor Roth going away in 2024?
Is the backdoor Roth loophole closed?
Who is not eligible for backdoor Roth IRA?
|
Filing status
|
Modified adjusted gross income (MAGI)
|
Contribution limit
|
|
Single individuals
|
≥ $153,000
|
Not eligible
|
|
Married (filing joint return)
|
< $218,000
|
$6,500
|
|
|
≥ $218,000 but < $228,000
|
Partial contribution (calculate)
|
|
|
≥ $228,000
|
Not eligible
|
What is the 5 year rule for backdoor Roth IRAs?
Is a backdoor Roth IRA right for You?
A backdoor Roth IRA may be right for you if you’d like to be able to contribute to a Roth IRA but you earn too much money to do so for the tax year in which you would like to contribute.
When can I make a backdoor Roth IRA contribution?
Note: A contribution using this backdoor Roth IRA strategy must be made by December 31 of the tax year in which a conversion happens. *Married (filing separately) can use the limits for single individuals if they have not lived with their spouse in the past year.
Does a backdoor Roth IRA convert a contribution?
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.
Could a backdoor Roth IRA benefit high-income earners?
A backdoor Roth IRA could benefit high-income earners. A “backdoor Roth IRA” is just a name for a strategy of converting nondeductible contributions in a traditional IRA to a Roth IRA. The strategy can be helpful for those who earn too much to contribute directly to a Roth IRA.