Advertisement
IRAs

Taxes When Using the Back Door Into a Roth IRA

The new tax law still allows high earners to contribute indirectly to a Roth IRA. But the tax bill for doing so will depend partly on whether they have other money in a traditional IRA.

Question: I read your column How to Undo a Roth Contribution If Your Income is Too High. But if your income is too high, can you -- under the new tax law -- still make backdoor Roth contributions by converting money from a traditional IRA to a Roth? If so, would this be a tax-free conversion if you immediately transfer your traditional IRA contribution to a Roth?

Answer: The new tax law didn't change your ability to make a "backdoor" Roth IRA contribution if your income is too high to contribute to a Roth directly. But the conversion will only be tax-free if you don't have any other money in a traditional IRA.

Advertisement - Article continues below

You can only contribute to a Roth IRA in 2018 if your modified adjusted gross income is less than $135,000 if you're single or $199,000 if married filing jointly. (The contribution amount starts to phase out if you earn more than $120,000 if you're single or $189,000 if married filing jointly.) But there's no income limit for converting money from a traditional IRA to a Roth. Some people who earn too much to contribute directly to a Roth make a nondeductible contribution to a traditional IRA, then quickly roll the money over to a Roth. This is called a backdoor Roth contribution. If the nondeductible contribution is the only money you have in a traditional IRA, then you won't owe taxes on the conversion, except on any gains that occurred between the time you made the contribution and the time you converted to the Roth.

Advertisement
Advertisement - Article continues below

But if you had any other money in a traditional IRA -- whether from tax-deductible contributions or rollovers from a 401(k) -- you may have to pay more in taxes. The tax-free portion of the conversion is based on the ratio of your nondeductible contributions to the total balance in all of your traditional IRAs. If you have $50,000 in traditional IRAs and you make $5,000 in nondeductible contributions, then 10% of your conversion will be tax-free and the remaining 90% will be taxable. See How to Calculate Tax-Free and Taxable IRA Withdrawals for more about figuring the tax consequences.

For more information about the procedure for making a backdoor Roth contribution, see How High Earners Can Set Up a Roth IRA.

Advertisement

Most Popular

What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Tax Changes and Key Amounts for the 2020 Tax Year
tax law

Tax Changes and Key Amounts for the 2020 Tax Year

Americans are facing a long list of tax changes for the 2020 tax year...and it's never too early to start thinking about next year's return.
June 22, 2020

Recommended

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for IRA or HSA contributions, paying estimated taxes and other deadlines, there's more to do by July 15 than just filing your federa…
July 10, 2020
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
July 9, 2020
8 Ways You Might Be Cheating on Your Taxes
taxes

8 Ways You Might Be Cheating on Your Taxes

Don't fall into these common traps that can get you in hot water with the IRS.
July 8, 2020
2020 Tax Deadline: When Are Tax Returns Due This Year?
tax deadline

2020 Tax Deadline: When Are Tax Returns Due This Year?

The April 15 deadline for filing your 2019 federal income tax return (and paying taxes) has been moved back...but the new due date is approaching fast…
July 8, 2020