facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause

Back-Door Roth Conversions

Doug Garrison, CFP, MBA - Senior Wealth Advisor

Suspicions that the IRS might come after individuals who have done a “back-door Roth conversion” have now been allayed. An IRS spokesperson has now stated that the Service agrees with Congressional intent, and recognized that taxpayers whose income has been too high to make contributions directly to a Roth IRA have another option: make a non-deductible contribution to a traditional IRA and then do a conversion. But there are rules that must be followed, and we recommend you work with a financial advisor to make sure you do it correctly. If you’re intrigued by the possibility of doing a “back-door Roth conversion” or simply want more information about it, read on.

Roth IRAs were initially established in 1997. Unlike a traditional IRA in which contributions are generally tax-deductible when made, and taxed (along with their earnings) upon distribution, contributions to a Roth IRA are made with after-tax funds. Contributions to a Roth IRA are not taxed at distribution and earnings within a Roth IRA can avoid being taxed by adhering to specific rules regarding when they may be withdrawn. More details about the advantages of a Roth IRA can be found in a different Investec blog.

Higher-earner workers may be unable to contribute directly to a Roth IRA. Joint filers whose modified adjusted gross income (MAGI) is more than $199,000 in 2018 are prohibited from making a contribution to a Roth IRA. Singles whose MAGI is above $135,000 are also prohibited from making a Roth IRA contribution. Lower income levels face phase-outs on the ability to contribute.

But there’s an alternative, if you meet certain conditions. If your income is too high, your contribution to a Roth IRA may find its way there by going through a “back-door.” What’s required?

First, you have to be eligible to make an IRA contribution—have earned income and make the contribution before the year in which you turn 70-1/2. There are no income limits on making an IRA contribution—your income and any coverage by an employer’s plan may make the contribution non-deductible, but you can still make it, if otherwise eligible.

Secondly, you make your non-deductible (after-tax) contribution (up to $5,500 or your MAGI, whichever is less, $6,500 if you’re over 50) into a traditional IRA. (You can also make a similar contribution into an IRA for a non-working spouse.)

Third, you convert the contribution by having it moved into your Roth IRA. If you have any other IRAs (including SEPs and SIMPLE IRAs) with any pre-tax contributions or untaxed earnings, a portion of your conversion will be taxable.

Fourth, you’ll need to file Form 8606 with your tax return. That form is used to report any after-tax contributions to IRAs, calculates what portion of your conversion is taxable, and reports the Roth conversion to the IRS.

If you do all that, you’ve undertaken what’s called a “back-door Roth conversion.” Now you can sit on your back porch and watch those funds grow tax-free! If you’d like some help in navigating through the Roth back-door, give us a call.

Let's Talk

Disclaimer: The information provided here is general and intended as educational in nature. It is not intended nor should it be considered as tax, accounting, or legal advice. Investec Wealth Strategies and its advisors do not provide tax, accounting, or legal advice. We recommend you seek the counsel of your attorney, accountant or other qualified tax advisor concerning your situation.