Back Door Roth IRA – What is it?

Americans with eligible earned income often contribute to an IRA. However, Roth IRA contributions are subject to income limitations. Does that mean if you earn too much that a Roth IRA is out of the question? No, it doesn’t!

There is a permissible strategy that some refer to as a “back door” Roth IRA, which is a way around this IRS income limitation that doesn’t violate any IRS rules.

How does it work? If you are under age 701⁄2 and have earned income, the key is knowing that you can contribute to a traditional IRA and that ANYONE can convert a traditional IRA to a Roth IRA at any time. Thus, high income earners under age 701⁄2 who are not eligible to make Roth IRA contributions due to income limits, can essentially still get the benefit of Roth contributions by creating a “back door” Roth IRA via conversion.

When you convert to a Roth IRA, the converted amount will be subject to income taxes – ordinary income taxes will be due for the tax year in which you trigger the conversion.
Keep in mind that for those who are under age 591⁄2, Roth IRA conversions have their own 5-year clock when it comes to determining whether Roth IRA withdrawals are penalty free.

 

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