Roth IRAs

Everything You Must Know About "Backdoor" Roth IRAs

If you earn too much to contribute directly to a Roth IRA, there are still ways to move funds to this type of an account.

Want to put money into a Roth IRA but earn too much? Use the “backdoor” Roth IRA strategy. 

Unlike traditional IRAs, the Roth version has an income threshold. The ability to make a direct contribution to a Roth IRA phases out for single filers with an adjusted gross income between $125,000 and $140,000, for 2021. For joint filers, it phases out between $198,000 and $208,000. 

For those with income over those thresholds, you can make nondeductible contributions to a traditional IRA and then later convert the traditional IRA to a Roth IRA. There are no income limits on nondeductible IRAs or conversions to a Roth. Since these contributions are nondeductible and have already been taxed, you can convert the money tax-free. 

However, if you have deductible contributions in a traditional IRA then only a portion of the funds converted to a Roth will be tax-free. You have to calculate the ratio of your nondeductible contributions compared with the total in the traditional IRA. That percentage will be tax free when you convert. 

For example, if you have $10,000 total in your traditional IRA with $1,000 in nondeductible contributions and $9,000 in deductible contributions then just 10% will be tax-free. You must pay your ordinary income tax on the remaining amount.

You could also rollover funds from a 401(k) account into a Roth IRA when you leave a job, if your 401(k) plan allows for this type of transfer. You will owe income taxes at your ordinary rate on any funds you put into your 401(k) pretax. 

Once you have converted either a 401(k) or a traditional IRA to a Roth, your withdrawals will be tax-free as long as you are at least 59 ½ and have had the Roth for a minimum of five years. You also won’t have to take required minimum distributions once you hit the age of 72. 

Most Popular

13 States That Tax Social Security Benefits
social security

13 States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in these 13 states, your Social Security benefits are subject to a state tax. That's on…
October 4, 2021
10 Best Stocks for Rising Interest Rates
stocks

10 Best Stocks for Rising Interest Rates

The 10-year Treasury yield is hovering near its highest level in months. Here are 10 of the best stocks to buy in a rising interest-rate environment.
September 30, 2021
How Big of a Threat Does Inflation Pose to Your Retirement?
retirement

How Big of a Threat Does Inflation Pose to Your Retirement?

You might be surprised how much inflation can nibble away at your retirement nest egg over time if you aren’t prepared.
October 3, 2021

Recommended

The Pros and Cons of Target Date Funds with Tony Drake
Financial Planning

The Pros and Cons of Target Date Funds with Tony Drake

The simplicity of target date funds has made them popular, particularly among 401(k) savers. But investors may be paying a price.
October 19, 2021
12 States That Won't Tax Your Retirement Income
Tax Breaks

12 States That Won't Tax Your Retirement Income

Retirees can save a lot of money in these states that completely exempt the most common types of retirement income – 401(k)s, IRAs and pensions – from…
October 19, 2021
14 States That Won't Tax Your Pension
Tax Breaks

14 States That Won't Tax Your Pension

Some states have pension exclusions with limitations based on age and/or income. But these states don't tax pension income at all, no matter how old y…
October 19, 2021
Taxes in Retirement: How All 50 States Tax Retirees
Tax Breaks

Taxes in Retirement: How All 50 States Tax Retirees

We rated every state, plus Washington, D.C., on how retirees are taxed. We considered taxes on Social Security and other retirement income, tax exempt…
October 19, 2021