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I’d like to ask about the backdoor Roth IRA. Say you are over the income limit for Roth contributions, so you make a traditional contribution with no tax deduction and then do a backdoor Roth. Is that conversion taxable? If so, you would be paying tax on that money twice since you paid tax on that income already. I’m confused.
– Jeff
The rules for backdoor Roth IRAs can seem confusing, and some scenarios are more complicated than others. Ideally, a nondeductible (after-tax) traditional IRA that gets converted into a Roth IRA would not be subject to any taxes, so the funds would not be taxed twice. To be clear, no converted funds would get double-taxed, but some circumstances can result in a taxable transaction. That’s where the rules get more complicated. (And that’s why it’s a good idea to consult with a financial advisor when deciding whether a backdoor Roth makes sense for you.)
Let’s take a quick step back and look at the backdoor Roth. Since many people are ineligible to make Roth IRA contributions due to their income levels, the backdoor Roth strategy helps sidestep those rules. And because Roth IRAs offer the opportunity for tax-free growth and withdrawals without the burden of required minimum distributions (RMDs), this can be a highly lucrative move to make.
For tax year 2023, you can’t contribute to a Roth IRA if your modified adjusted gross income (MAGI) is more than $153,000 for single filers or $228,000 for married couples filing jointly. Those limits increase to $161,000 and $240,000, respectively, for 2024.
While you’d be locked out of contributing to a Roth IRA if your income exceeds these limits, you can still contribute to a traditional IRA regardless of your income level. That’s the starting point for your backdoor Roth.
The mechanics of creating a backdoor Roth are straightforward (ignoring the tax issues for a moment). You contribute to a traditional IRA and then convert it to a Roth IRA. It’s that easy. (But if you need additional guidance concerning backdoor Roth conversions or other financial maneuvers, consider speaking with a financial advisor.)
For many people, the long-term tax benefits of Roth conversions far outweigh the downsides. Those benefits include:
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Tax-free growth
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Tax-free withdrawals in retirement
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No RMD requirements, so you can let your money grow for as long as you want
But in some cases, the drawbacks outweigh the benefits. A backdoor Roth conversion may not make good financial sense if:
