Is the backdoor Roth IRA still allowed?
Yes, the backdoor Roth IRA is still allowed in 2024. However, there are some income limits and other requirements that you need to be aware of before you can contribute to one.
What is a backdoor Roth IRA?
A backdoor Roth IRA is a way for high-income earners to contribute to a Roth IRA, even though they are not eligible to make direct contributions. This is done by making an after-tax contribution to a traditional IRA and then converting it to a Roth IRA.
Who is the backdoor Roth IRA for?
The backdoor Roth IRA is for high-income earners who want to contribute to a Roth IRA but are not eligible to make direct contributions. This includes people who are single and have a modified adjusted gross income (MAGI) of $146,000 or more, or people who are married filing jointly and have a MAGI of $230,000 or more.
How to set up a backdoor Roth IRA
There are two ways to set up a backdoor Roth IRA:
- Contribute money to a traditional IRA and then roll over the money to a Roth IRA. For this strategy to work, you should contribute to a traditional IRA with no balance. If there’s a balance in the IRA, there could be a taxable event when you convert. Once you contribute to the account and wait for any required holding period, you’ll then convert the account to a Roth IRA. Any money earned due to market performance before the conversion takes place is subject to taxes. The contribution is considered nondeductible once you fill out IRS Form 8606 and complete your tax return. Note that there’s no tax benefit for the year you establish a backdoor Roth IRA.
- If your 401(k) plan allows, you may be able to do a mega backdoor Roth conversion. Some 401(k) plans permit automatic Roth conversions, which means you can make after-tax contributions and have them automatically convert to Roth within their accounts. Check with your plan to see if this option is available to you.
Benefits of a backdoor Roth IRA
- Tax-free growth: The money in a Roth IRA grows tax-free. This means that you won’t have to pay taxes on the money when you withdraw it in retirement.
- Tax-free withdrawals: When you withdraw money from a Roth IRA in retirement, you won’t have to pay taxes on the money. This is a big advantage over traditional IRAs, where you have to pay taxes on the money when you withdraw it.
- No required minimum distributions (RMDs): You are not required to take minimum distributions from a Roth IRA after you turn 73. This means that you can keep the money in the Roth IRA and let it continue to grow tax-free.
Drawbacks of a backdoor Roth IRA
- Income limits: You can only contribute to a backdoor Roth IRA if your MAGI is below certain limits.
- Tax implications: If you have a balance in a rollover IRA and plan to contribute to that account, you may not want to make a backdoor Roth conversion because of the “pro rata” rule. This rule requires all IRA distributions to be taken proportionally from your pre-tax and after-tax contribution sources. This could limit the tax benefits you’d receive from a Roth conversion. For example, if you have a total of $1 million in IRA assets, and $100,000—or 10%—is after-tax money, then 10% of any withdrawal must be taken from after-tax money. For a $10,000 withdrawal, $1,000 would have to be after-tax money.
- Complexity: Setting up a backdoor Roth IRA can be complex. It’s important to work with a financial advisor to make sure you do it correctly.
When should you not consider this strategy?
A backdoor Roth IRA doesn’t make sense for everyone. If you’re able to make a Roth IRA contribution the standard way, then you don’t need to use the backdoor method.
If you have a balance in a rollover IRA and plan to contribute to that account, you may not want to make a backdoor Roth conversion because of the “pro rata” rule. This rule requires all IRA distributions to be taken proportionally from your pre-tax and after-tax contribution sources. This could limit the tax benefits you’d receive from a Roth conversion. For example, if you have a total of $1 million in IRA assets, and $100,000—or 10%—is after-tax money, then 10% of any withdrawal must be taken from after-tax money. For a $10,000 withdrawal, $1,000 would have to be after-tax money.
It’s important to keep in mind when you plan to use the money. If you’re looking to withdraw the money within 5 years, you may not receive all the Roth tax benefits.* Also, when creating a backdoor Roth IRA, you’ll have to work with an accountant to file tax forms to ensure you complete it accurately.
FAQs
What makes a backdoor Roth IRA different?
The difference is the way you make your contribution. High-income earners use the backdoor technique to establish a Roth IRA since they’re unable to contribute in the standard way because of the Roth IRA income limits.
Do you pay taxes on backdoor Roth IRAs?
If you contribute money to an investment that accrues earnings before you complete the conversion, then you’ll have to pay taxes on those earnings. Once the money is in a Roth IRA, your withdrawals will be tax-free if you meet certain requirements. If you’re subject to the pro rata rule, your IRA distributions must be taken proportionally from your pre-tax and after-tax contribution sources.
Are backdoor Roth IRAs worth it?
You should consult with an advisor or tax professional to discuss your personal situation. It’s best to sit down with an advisor who can help you determine if a backdoor Roth IRA would be beneficial to your situation.
How much can I contribute?
You can contribute up to $7,000 ($8,000 if age 50 and older) to a Roth IRA in 2024, if your income is below the phaseout amounts.
What are alternatives to backdoor Roth IRAs?
If your income is above the phaseout amount and you don’t want to complete a backdoor Roth conversion, then your alternative is to invest in taxable accounts. They won’t offer the same tax benefits but will give you an opportunity to diversify your investments.
The backdoor Roth IRA can be a valuable tool for high-income earners who want to save for retirement in a tax-advantaged way. However, it’s important to understand the rules and requirements before you get started. If you’re not sure whether a backdoor Roth IRA is right for you, talk to a financial advisor.
Who should consider a Backdoor Roth?
For those who have reached their maximum traditional IRA contribution or who are not eligible to make direct contributions to a Roth IRA, a Backdoor Roth could be a wise choice.
In the following circumstances, a Backdoor Roth IRA might be a wise choice:
- High earners: You can use the Backdoor Roth IRA technique to contribute to a Roth IRA if your income is too high to be eligible for one.
- Contributions to a traditional IRA maxed out: If you’ve reached your maximum contribution amount in a traditional IRA but still want to save more, you can increase your tax-free growth with a Backdoor Roth IRA.
- Retirement savers in a lower tax bracket now: You can use a Backdoor Roth IRA to pay taxes on your contributions now if you anticipate being in a higher tax bracket when you retire.
Not everyone should use a Backdoor Roth IRA, and there may be tax repercussions to take into account. You should consult your financial advisor to find out if this is the best course of action for your financial objectives.
Can you do Backdoor Roth and Mega Backdoor Roth?
It is possible to execute both a backdoor and a mega backdoor Roth IRA simultaneously. You must have access to a 401(k) that accepts after-tax contributions and an in-plan Roth conversion option in order to execute a mega backdoor Roth.
Should I Hold Off On My Back-Door Roth Conversion For This Year?
FAQ
Is backdoor Roth still allowed in 2024?
Is the backdoor Roth loophole closed?
Is Mega backdoor Roth still allowed?
What is the 5 year rule for backdoor Roth IRAs?
Can you do a backdoor Roth IRA?
If your IRA provider won’t manage the transfer of funds and hands you a check, you can still do a backdoor Roth IRA. But you must deposit the check in a new Roth IRA account within 60 days. Otherwise, it may be considered an early withdrawal, with potential taxes and penalties. Immediately convert your new traditional IRA to a Roth IRA.
Are backdoor Roth IRAs still allowed in 2024?
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. Currently, backdoor Roth IRAs are still a legal way to get around the income limits in place, in terms of being able to contribute directly to a Roth IRA.
Is the backdoor Roth IRA strategy a problem?
The IRS’s informal position is that the Backdoor Roth IRA strategy is not a problem. However, taxpayers may wish to wait some time between the contribution to the Traditional IRA and the conversion to the Roth IRA. The Roth IRA is among the most tax advantageous investment vehicles allowed by the government.
Could a backdoor Roth IRA benefit high-income earners?
A backdoor Roth IRA could benefit high-income earners. A “backdoor Roth IRA” is just a name for a strategy of converting nondeductible contributions in a traditional IRA to a Roth IRA. The strategy can be helpful for those who earn too much to contribute directly to a Roth IRA.