A Backdoor Roth IRA Conversion allows contributions to a Roth IRA, even for those who exceed adjusted gross income (AGI) limits for making direct Roth contributions. Qualified Roth withdrawals are entirely tax-free and required distributions can be delayed, making it an ideal inheritance strategy.
A Backdoor Roth IRA Conversion allows contributions to a Roth IRA, even for those who exceed adjusted gross income (AGI) limits for making direct Roth contributions. Qualified Roth withdrawals are entirely tax-free and required distributions can be delayed, making it an ideal inheritance strategy.
What is a Backdoor Roth IRA Conversion?
Example: Mrs. Saver earns $250,000 per year, which means she does not qualify for a Roth IRA, but wants to contribute $6,500. She can contribute $6,500 to a Traditional IRA and immediately convert the $6,500 to a Roth IRA. The Traditional-to-Roth conversion incurs no tax and the funds now reside in an account that can grow entirely tax-free.
Who can participate in a Backdoor Roth IRA Conversion?
Eligibility: Anyone can be eligible for this strategy!
Important Caveat: There is one catch – for the strategy to work best, one should not have any pre-tax money in IRA accounts. Pre-tax money in IRAs usually comes from deductible IRA contributions and 401(k) rollovers. When one has any pre-tax funds in a Traditional IRA, the conversions will be subject to the pro-rata rule.
This means that the non-taxable portion of the conversion will be limited to the ratio of your basis in the IRAs (i.e.: non-taxable contributions) to the aggregate total of your IRAs. Qualified plan dollars (i.e.: employer plans) are not aggregated for these purposes, so 401(k)s and 403(b)s are not a problem.
When can I withdraw from my Backdoor Roth IRA Conversion?
A Note About Withdrawals: Qualified Roth withdrawals are entirely tax-free and required distributions can be delayed until 10 years after the deaths of the original owner and his/her spousal beneficiary, making it an ideal inheritance for heirs.
Rollover Process: The process involves making contributions to a Traditional IRA, which does not have income-based restrictions for contributions and is funded with after-tax dollars. After funding the Traditional IRA, an individual quickly converts the funds to a Roth IRA.
We are here to help
Consult your financial advisor and a tax professional to understand how to best execute this strategy. Our team is prepared to assist you in navigating this strategy. The Prudent Speculator team, in partnership with John Roessler, CPA, CFP, would love to connect with you.
