Can I Make A Backdoor Roth IRA Contribution?

Do you want to save for retirement but aren’t eligible to make any more direct contributions to your Roth IRA?

If you find yourself in this situation, a backdoor Roth IRA may be the best solution for you.

Roth IRAs are a great way to save for retirement, however, there are contribution limits based on your earned income. Thankfully, there is a legal workaround called the Backdoor Roth IRA Contribution.

To implement this strategy without receiving a penalty, there are complicated steps you must take, and rules that you must consider. As always, it is best to consult with a financial advisor to address your specific situation and considerations.

This article will tell you all you need to know about a Backdoor Roth Contribution and provide you with a step-by-step guide to setting up your Backdoor Contribution. You will also learn the Roth IRA contribution rules and how to know if you are eligible to contribute to a Roth IRA.

What is a Backdoor Roth IRA?

The Backdoor Roth IRA is a legitimate tax loophole that allows high earners to continue contributing to a Roth IRA, even if their income exceeds the limits for a direct contribution.

The strategy is straightforward:

Make a nondeductible contribution to your traditional IRA.
Convert your traditional IRA into a Roth IRA.

Because the non-deductible contribution to the traditional IRA was made with after-tax dollars, the conversion to a Roth IRA will not result in any additional taxes owed.

This can be a useful strategy for individuals who want to save for retirement on a tax-advantaged basis but cannot make direct contributions to a Roth IRA due to income limits.

Who Can Contribute to a Roth IRA?

To contribute to a Roth IRA, you must have earned income and be within certain income limits. Earned income includes wages, salaries, tips, and other forms of payment you receive from working.

The income limits for Roth IRA contributions are based on your tax filing status and your modified adjusted gross income (MAGI).

In addition to having earned income and being within the income limits, there are a few other requirements you must meet to contribute to a Roth IRA:

You must be younger than 70 ½ years old.
You cannot be a participant in a workplace retirement plan, such as a 401(k) plan unless your income is below a certain threshold.
You must have a Roth IRA account that is open and available to receive contributions.

If you meet all of these requirements, you can contribute to a Roth IRA up to the annual contribution limit, which is currently $6,000 (or $7,000 if you are age 50 or older). This goes up in 2023 to $6,500 for those under 50 and $7,500 for those over. You can contribute to a Roth IRA for a given tax year up until the tax filing deadline for that year (typically April 15 of the following year).

To help make the analysis easier, we have created the “Can I Make a Backdoor Roth IRA Contribution” flowchart.

It addresses key considerations, including:

Multiple retirement accounts
Pro-rata and aggregation rules
Step-transaction doctrine
A step-by-step process for making a Backdoor Roth Contribution

Backdoor and Roth IRA Contribution Rules

The rules for Roth IRA contributions are as follows:

You must earn an income and be within certain income limits to contribute to a Roth IRA. The income limits are based on your tax filing status and your modified adjusted gross income (MAGI).
The maximum amount you can contribute to a Roth IRA is the lesser of your earned income or the annual contribution limit for IRAs, which is currently $6,000 (or $7,000 if you are age 50 or older).
You can contribute to a Roth IRA for a given tax year up until the tax filing deadline for that year (typically April 15 of the following year).
If you are married and your spouse also has earned income, you can each contribute to your own Roth IRA up to the annual contribution limit. This can allow you to contribute a total of twice the annual contribution limit to your Roth IRAs each year.
If you are married and your spouse does not have earned income, you may still be able to make contributions to a Roth IRA on behalf of your spouse. This is known as a spousal Roth IRA contribution, and it allows you to contribute to a Roth IRA for your spouse even if your spouse does not have any earned income.

Step By Step Process to Making a Backdoor Roth IRA Contribution

If you earn over $130,500 per year or have already contributed the maximum amount to your 401(k) and would like to continue saving for retirement, you may want to look into a backdoor Roth IRA.

The process for making a backdoor Roth contribution involves the following steps:

By following these steps, you can make backdoor Roth contributions and enjoy the benefits of a Roth IRA, even if your income exceeds the limits for making direct contributions.

This can be a powerful tool for building a tax-advantaged retirement savings plan and achieving your financial goals.

1. Determine Eligibility

Determine if you are eligible to make a nondeductible contribution to a traditional IRA. To be eligible, you must have earned income and not be covered by a workplace retirement plan.

2. Open A Traditional IRA

Open a traditional IRA and make a nondeductible contribution to the account. The yearly IRA contribution limit is the lesser of your earned income or $6,000 ($7,000 if you are 50 or older).

3. Open Roth IRA

To open your Roth IRA and complete a conversion from the traditional IRA to the Roth IRA. You will need to provide information about the traditional IRA and the amount you want to convert to the Roth IRA.

4. Include Other Traditional IRAs

If you have other traditional IRAs that contain deductible contributions or earnings, you will need to include those amounts in the taxable portion of the conversion. This may result in some taxes being owed on the conversion.

5. Report

Report the conversion on your tax return for the year in which it was completed. This will typically be done using Form 8606.

6. Make Contributions

Continue to make non-deductible contributions to your traditional IRA each year, and convert those amounts to your Roth IRA. This will allow you to gradually build up your Roth IRA balance over time.

By following these steps, you can make backdoor Roth contributions and enjoy the benefits of a Roth IRA, even if your income exceeds the limits for making direct contributions.

This can be a powerful tool for building a tax-advantaged retirement savings plan and achieving your financial goals.

Ready To Take Advantage of the Backdoor Roth IRA?

At The Retirement Planning Group, we work with you to ensure you are making the most of your Roth IRA and Backdoor Contributions. These contribution rules can be tricky and difficult to navigate. Knowing what a Backdoor Roth IRA is important as is knowing how and when to contribute. As always, we recommend working with a professional financial advisor or wealth manager to ensure you make the correct steps in contributing to your Roth IRA or Backdoor Roth IRA plan.

We begin our process with a no-obligation phone call where we discuss your options, and answer any questions you may have about a Backdoor Roth IRA contribution. Give us a call today to see how we can help.

For more guidance on Roth IRA contributions, don’t forget to check out our 2023 Guide to Backdoor Roth IRAs!

Download Flowchart Now