Why are backdoor Roth IRAs allowed?
Roth IRA Income Limits
A backdoor Roth IRA is a conversion that allows high earners to open a Roth IRA despite IRS-imposed income limits. Basically, you put money you've already paid taxes on in a traditional IRA, then convert your contributed money into a Roth IRA, and you're done.
Understanding Backdoor Roth IRAs
The limits are as follows: For 2023: Between $138,000 and $153,000 for single filers and $218,000 and $228,000 for joint filers. For 2024: Between $146,000 and $161,000 for single filers and $230,000 and $240,000 for married couples filing jointly.4.
In Billy's example, he already has pre-tax dollars in his Traditional IRA account. To avoid the Pro-Rata Rule, he will first need to remove all the pre-tax money from the account. Typically, the best way to accomplish this is by rolling the pre-tax Traditional IRA balance into your current employer's retirement plan.
Backdoor Roth IRA income limits
If your modified adjusted gross income (MAGI) is above certain income limits, then the amount you can contribute to a Roth IRA is phased out. The phaseout occurs between $146,000 and $161,000 for single filers and $230,000 and $240,000 for joint filers in 2024.
Cons: All or part of a backdoor Roth IRA conversion could be a taxable event. You may have to pay federal, state, and local taxes on converted earnings and deductible contributions. Conversions could kick you into a higher tax bracket for the year.
A backdoor Roth is a legal tax loophole that allows high earners to keep contributing to a Roth IRA. Sneaking funds in the “backdoor” like this lets you still make the maximum contribution to a Roth — $6,500 in 2023 — even if your income level technically disqualifies you.
Although there has been talk of eliminating the backdoor Roth in recent years, this option is still allowed in 2023.
Backdoor Roth IRA contribution limit
In 2024, the contribution limits rise to $7,000, or $8,000 for those 50 and older. So if you want to open an account and then use the backdoor IRA method to convert the account to a Roth IRA, that's the maximum you can contribute for those tax years.
You pay no tax on either principal or earnings when you withdraw your money (although you must be at least age 59½ and have had the Roth for five years). There's no time requirement on when you have to withdraw money, if ever—an appealing option for those wanting to leave the money to heirs.
At what age does a Roth IRA not make sense?
Even when you're close to retirement or already in retirement, opening this special retirement savings vehicle can still make sense under some circumstances. There is no age limit to open a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one.
The Pro-Rata rule applies if your Traditional IRA contains both pre-tax and after-tax contributions. The Pro-Rata Rule is used to determine the ratio that should be applied in determining how much of the conversion is pre-tax vs after tax. You are not able to choose only the after-tax portion when doing a conversion.
I am doing a backdoor Roth, and want to avoid the pro-rata rule. The general way to do this is to reverse rollover the pre-tax IRA contributions to the 401(k) so that the pre-tax IRA balance is $0 on December 31. All good.
Exception for rollovers to a company plan or charitable rollovers. Under the Tax Code, only pre-tax dollars can be rolled from an IRA into a company plan. If you are making a rollover from your IRA to a company plan, disregard the pro-rata rule altogether.
For the mega backdoor Roth, the pro rata rule means you can't exclusively make an in-service withdraw of post-tax contributions if your traditional 401(k) balance includes a mix of pre- and post-tax money. Instead, you may need to rollover your entire 401(k) balance in a mega backdoor Roth maneuver.
Bottom Line. You won't pay double taxes with a backdoor Roth, but you may end up paying some taxes depending on your financial situation. Talk with your financial advisor before making this move to minimize taxes and maximize retirement benefits.
A backdoor Roth IRA could be a great option for: High-income earners who don't qualify for a Roth IRA due to income limits. People who can afford to pay the taxes involved in rolling over money into a Roth account and want their money to grow tax-free.
If you already have a traditional IRA, there's no reason you can't use it for a backdoor Roth IRA conversion, but remember that the funds you have saved in it may impact the amount you owe in taxes.
If you earn too much to make deductible contributions to a traditional IRA, you can still make after-tax contributions, up to the annual limit, and then convert them to a Roth. As with all Roth conversions, the pro rata rule applies.
Can I contribute to a Roth IRA if I make over 200k?
To contribute to a Roth IRA, single tax filers must have a modified adjusted gross income (MAGI) of less than $153,000 in 2023.
A backdoor Roth can be created by first contributing to a traditional IRA and then immediately converting it to a Roth IRA (to avoid paying taxes on any earnings or having earnings that put you over the contribution limit).
How many Roth IRAs? There is no limit on the number of IRAs you can have. You can even own multiples of the same kind of IRA, meaning you can have multiple Roth IRAs, SEP IRAs and traditional IRAs. That said, increasing your number of IRAs doesn't necessarily increase the amount you can contribute annually.
New Strategy: Super Roth IRA Creates Tax Free Growth and Tax Free Income Without Income Limitations. Roth IRAs provide attractive tax benefits to incentivize saving for retirement, such as: Withdrawals are tax-free in retirement.
The backdoor Roth IRA is best for converting money from a traditional account to a Roth. Meanwhile, the mega backdoor Roth is most suitable for high earners who want to contribute more than the typical contribution limit. Consider working with a financial advisor before committing to one or the other.