What is a Backdoor Roth IRA?
A Backdoor Roth IRA is a strategy that allows high-income earners to contribute to a Roth IRA, despite the income limits that typically apply. Since Roth IRAs have income restrictions, individuals with modified adjusted gross income (MAGI) above a certain threshold (e.g., $208,000 for married couples or $140,000 for single filers in 2023) are prohibited from contributing directly to a Roth IRA.
How it Works
The Backdoor Roth IRA process involves two main steps:
- Make a Non-Deductible Contribution: First, you contribute to a traditional IRA. Importantly, this can be a non-deductible contribution, meaning you do not get a tax deduction for the contribution.
- Convert to Roth IRA: After the contribution, you then convert the traditional IRA to a Roth IRA. There is no income limit on conversions, making this strategy accessible to high earners.
Tax Considerations
When converting, you may owe taxes on any gains in the traditional IRA, but if you convert immediately without allowing significant growth, this tax burden can be minimized. It's essential to consult a tax professional to understand the implications and ensure compliance with IRS rules.
Benefits of Backdoor Roth IRA
- Tax-free growth and withdrawals in retirement.
- No required minimum distributions (RMDs) during the account owner's lifetime.
- Potential estate planning benefits.
In summary, a Backdoor Roth IRA provides a valuable opportunity for high-income individuals to enjoy the benefits of a Roth IRA and enhance their retirement savings strategy.