Backdoor Roth IRA

Author

Senior Tax Advisory Group

Posted on

Jan 25, 2023

Book/Edition

Colorado - Colorado Springs

Generally, you can only contribute to a Roth IRA if you have taxable compensation and income less than the top of the phaseout range for your filing status (see chart below). If your income is greater than that threshold amount, you are prohibited from contributing directly to a Roth IRA. A “backdoor Roth IRA” allows a taxpayer to bypass income limitations by first making a nondeductible contribution to a traditional IRA and then converting it into a Roth IRA. Due to the distribution rules for traditional IRAs, this works best if you have no other traditional IRAs.

 

Roth IRA Limits — 2023                        Roth IRA Phaseouts

Individual Contribution Limits              MFJ or QW $ 204,000 to $ 214,000

        Under age 50 $ 6,500                            Single, HOH, $ 129,000 to $ 144,000

                                                                                                                                                  Age 50 or older $ 7,500  

 

 

Conversion of nondeductible IRA.

If you make a nondeductible contribution to a traditional IRA, you can convert the entire amount tax-free. Only the earnings on the nondeductible IRA contributions are taxed.

Example: Manny is single and has a modified AGI of $250,000. He wishes to save money in a Roth IRA so he can make nontaxable withdrawals upon retirement. In 2022, he opens a traditional IRA with a $6,000 nondeductible contribution and a couple months later, converts it to a Roth IRA. He has no other traditional IRAs. At the time of Roth conversion, the account had increased in value by $250, which is the only taxable part of the conversion.

Working with the right financial professional is critical! Be sure to work with a financial professional who understands taxes and can help you plan and take the necessary steps toward a tax-free retirement.

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