What is a backdoor Roth IRA?

A back-door Roth IRA is a maneuver that allows High-Income Professionals (HIPs) to contribute to a Roth IRA. Because you are disqualified from contributing directly to a Roth IRA if your Adjusted Gross Income (AGI) exceeds limits imposed by the IRS, HIPs lose the ability to make direct Roth IRA contributions. In 2016, you cannot contribute to a Roth IRA if your AGI exceeds $194k (MFJ) or $132k if you file Single or HOH.

To convert to a back-door Roth, you first contribute to a TIRA (Traditional IRA), which is nondeductible. You then convert the amount in the TIRA to a Roth IRA. You can convert your non-deductible TIRA funds at any time, not just in the year you contribute them.

If your account has any earnings between the time you contributed to the TIRA and the conversion, you will owe income taxes on the earnings. If the account has decreased in value (lost money), you will not get to deduct the “loss”.

Be sure to file IRS Form 8606 for any year that you contribute to a nondeductible TIRA and when you convert to a back-door Roth IRA. If you convert in the same year of the contribution, you will file only one Form 8606.

Vlog: How does a backdoor Roth IRA work?

When should you convert to a backdoor Roth IRA?

What is the wrong time to convert to a backdoor Roth IRA?

What is a Roth IRA and do I need one?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s