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Backdoor Roth IRA and Conversions

Backdoor Roth IRA and Conversions

December 15, 2023

A "Backdoor” Roth IRA is a type of conversion that allows people with high income to fund a Roth despite IRS income limits. Basically, you put money you’ve already paid taxes on in a traditional IRA, then convert your contributed funds into a Roth IRA. 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, allowing your money to grow tax-free.


Roth IRA Income Limits:

For 2022 the limit increased to $144,000 for single filers and $214,000 for married individuals filing jointly. For 2021, the government allows only those people with modified adjusted gross income below $208,000 (married filing jointly) or $140,000 (single) to contribute to a Roth IRA. If your income is above the limit, a backdoor Roth might be a good solution for you.


How to make 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.


  1. Convert your contribution to a Roth IRA. Your IRA administrator will give you the instructions and paperwork. If you don’t already have a Roth IRA, you’ll open a new account during the conversion process.


  1. 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.


Types of Transfers - The conversion needs to be one of the following:

  1. Rollover, where you receive the money from your traditional IRA and deposit it into the Roth IRA within 60 days.


  1. A Trustee-to-Trustee Transfer, where the traditional IRA provider sends the money directly to your Roth IRA provider.


  1. A "Same Trustee Transfer," where your money goes from the traditional IRA to the Roth at the same financial institution.


The Pro-Rata Rule for a Backdoor Roth IRA:

The IRS requires rollovers from traditional IRAs to Roth IRAs to be done pro rata. 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 percentage consisting of pre-tax money and after-tax money. This ratio will determine what percentage of the money you convert to a Roth that will be taxable. No matter how much money you convert, or which IRA account you pull the money from, the pre-tax percentage of the amount you convert to the Roth will be taxable. The IRS applies the pro-rata rule to your total IRA balance at year-end, not at the time of conversion.


We recommend contacting your CPA to see if a backdoor Roth IRA would apply to you. If you decide to move forward, please let us know.


Wellacre Global Wealth Advisors, Financial Planning Consultants, Santa Monica, CA