Backdoor Roth IRA: Definition, Rules and How To Open One - NerdWallet (2024)

FAQs

What is the backdoor method for Roth IRAs? ›

A “backdoor” Roth IRA allows high earners to sidestep the Roth IRA's income limits by converting nondeductible traditional IRA contributions to a Roth IRA. That typically requires you to pay income taxes on funds being rolled into the Roth account that have not previously been taxed.

Accessed Apr 8, 2022. You'll need the money in five years or less. Money converted from an IRA to a Roth IRA falls under a Roth five-year rule: If you don't wait five years to withdraw it, you could owe taxes and a 10% penalty. The withdrawal from your IRA will push you into a higher income tax bracket.

Yes. Backdoor Roth IRAs are still allowed in 2024. However, there has been talk of eliminating the backdoor Roth in recent years. And the future is, of course, difficult to predict.

The term “backdoor” reflects the indirect nature of this contribution method. As of 2024, single filers with modified adjusted gross income (MAGI) above $161,000 and married couples above $240,000 are ineligible to contribute to a Roth IRA directly.

Cons: All or part of a backdoor Roth IRA conversion could be a taxable event. You may have to pay federal, state, and local taxes on converted earnings and deductible contributions. Conversions could kick you into a higher tax bracket for the year.

Understanding Backdoor Roth IRAs

The limits are as follows: For 2023: Between $138,000 and $153,000 for single filers and between $218,000 and $228,000 for joint filers. For 2024: Between $146,000 and $161,000 for single filers and between $230,000 and $240,000 for married couples filing jointly4.

To be clear, no converted funds would get double-taxed, but some circ*mstances can result in a taxable transaction.

Each conversion or rollover you make is subject to a separate five-year waiting period. If you don't wait the requisite five-year period from conversion to withdrawal, you may have to pay a 10% penalty, along with any income taxes owed.

While it doesn't look like they'll be eliminated in 2024, the future of the Backdoor Roth IRA remains a target of proposed legislation. Some legislative efforts have already been taken to limit Roth IRAs or to change tax brackets and RMDs in the future.

But once your federal income tax bracket hits 24%, you're at roughly a neutral state. If your federal income tax bracket is 32% or higher, doing a Backdoor Roth IRA is a terrible, terrible idea. It is highly unlikely you will be making more money, and thereby being in a higher tax bracket in retirement!

What is the holding period for backdoor Roth? ›

You expect to need the money you contribute to the backdoor Roth in the next five years. You'll have to pay a 10% penalty if you withdraw it before the five-year period has passed. 6.

The tax requirements for a backdoor Roth IRA involve reporting nondeductible contributions to a traditional IRA and subsequent conversions to a Roth IRA on Form 8606. Failing to do so, could cost you more money in IRS penalties and additional taxes on the converted amount.

A mega backdoor Roth allows high-earning investors — who otherwise couldn't put money in a Roth account because of income restrictions — to move money from a 401(k) plan to a Roth IRA or Roth 401(k) plan.

Income: To contribute to a Roth IRA, you must have compensation (i.e. wages, salary, tips, professional fees, bonuses). Your modified adjusted gross income must be less than: $160,000 - Married filing jointly. $10,000 - Married filing separately (and you lived with your spouse at any time during the year).

A mega backdoor Roth refers to a strategy that can potentially allow some people who would be ineligible to contribute to a Roth account, based on their income or contribution limits, to transfer certain types of 401(k) contributions into a Roth—including a Roth IRA and/or Roth 401(k).

The backdoor Roth IRA is not a different type of Roth IRA account. Rather, it informally refers to the method through which high-income earners can fund a Roth IRA in an IRS-sanctioned way. Instead of contributing to a Roth IRA, you convert funds from a Traditional IRA to your Roth IRA.

The tax requirements for a backdoor Roth IRA involve reporting nondeductible contributions to a traditional IRA and subsequent conversions to a Roth IRA on Form 8606. Failing to do so, could cost you more money in IRS penalties and additional taxes on the converted amount.

The point of a Roth IRA is that it's already taxed money that grows tax-free. So, to convert your traditional IRA to a Roth IRA you'll have to pay ordinary income taxes on your traditional IRA contributions in the year of the conversion before they “count” as Roth IRA funds.

To be clear, no converted funds would get double-taxed, but some circ*mstances 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.)