You may wish to use a Roth account to save for retirement, but your income prevents you from making direct contributions to a Roth IRA. It’s also possible that your employer does not offer a Roth 401(k) plan. If so, you might be interested in finding out more about the backdoor Roth IRA tactic.
Can you do a backdoor Roth IRA if you’re married and filing your taxes separately?
The answer, unfortunately, is no.
Current regulations prohibit married individuals filing separate tax returns from contributing to a Roth IRA, regardless of their income level. This restriction applies even if you’re considering a backdoor Roth IRA strategy.
Understanding the Backdoor Roth IRA
A backdoor Roth IRA is a strategy that allows high-income earners to contribute to a Roth IRA, even though they exceed the income limits for direct contributions. It involves making a non-deductible contribution to a traditional IRA and then converting that contribution to a Roth IRA.
However, the IRS’s aggregation rule applies to backdoor Roth conversions. This means that all your traditional IRAs are treated as one account for tax purposes, regardless of where you hold them.
Why Married Filing Separately Can’t Do Backdoor Roth
The aggregation rule poses a significant challenge for married individuals filing separately who want to utilize the backdoor Roth strategy.
If one spouse has a traditional IRA with pre-tax contributions, the conversion of the other spouse’s non-deductible contribution will be partially taxable, even if they don’t have any pre-tax contributions in their own traditional IRA.
This is because the IRS calculates the taxable portion of the conversion based on the ratio of pre-tax contributions to total contributions across all traditional IRAs held by both spouses.
Alternatives for Married Filing Separately
While a backdoor Roth IRA isn’t an option for married individuals filing separately, there are still ways to save for retirement and potentially enjoy tax-free growth:
- Traditional IRA with Rollover: You can contribute to a traditional IRA and later roll over the funds to a Roth IRA once you meet the income eligibility requirements. However, the rollover amount will be subject to income tax.
- 401(k) with Roth Option: If your employer offers a 401(k) plan with a Roth option, you can contribute directly to the Roth portion of the plan, regardless of your income level.
- Taxable Investments: Consider investing in taxable accounts, where you can choose to sell assets and pay capital gains taxes only when you withdraw the funds.
While the backdoor Roth IRA is a valuable tool for many high-income earners, it’s not available to married individuals filing separately due to the IRS aggregation rule. However, alternative strategies can still help you achieve your retirement savings goals and potentially enjoy tax-free growth.
Before making any investment decisions, it’s crucial to consult with a qualified financial advisor to determine the best approach for your specific circumstances.
Backdoor Roth IRA tax considerations
Determining the potential tax liability on a conversion is where the procedure can become intricate. The taxes arising from a Roth IRA conversion through a backdoor can be substantial and intricate. This is particularly valid if you own multiple traditional IRAs.
If your IRA(s) contain any contributions that are not tax deductible, you should know the potential tax implications and have a strategy in place for how you will find the money to pay the taxes that will be due when you file your taxes.
Investment returns on both deductible and nondeductible contributions, as well as any deductible contributions (contributions that are subtracted from your taxable income for the year in which they were made), are always subject to ordinary income tax in a Roth conversion at your marginal tax rate or higher.
Determine what kind of contributions are in each of your traditional IRAs if you have more than one. There are two possible kinds: nondeductible contributions and/or deductible contributions plus any earnings. (The nondeductible contributions are recorded annually on IRS Form 8606; it may be a good idea to confirm that this form is filed by consulting with your tax advisor.) Deductible contributions and any earnings from a conversion are typically taxable, but nondeductible contributions are typically not
But you can’t pick and select which of your nondeductible contributions to convert. Rather, the amount of tax you owe on a conversion will depend on how much of your total traditional IRA accounts’ earnings and deductible contributions exceed your nondeductible contributions. (It does not include spousal or inherited IRAs. This is because, when determining the taxes due on a conversion, the IRS treats all of your traditional IRAs as a single tax entity under something known as the IRA aggregation rule. The IRS views your five separate traditional IRAs as a single entity that you are converting from.
Thus, let’s say, for example, that you have combined traditional IRAs worth $50,000, which are made up of 90% deductible contributions and 10% nondeductible contributions. 90% of the money you decide to convert into a Roth IRA would be taxable if you wanted to convert $5,000 to that account. Paying your applicable tax rate on $4,500, or 90% of the $5,000, is what you would do.
Keep in mind that in addition to federal taxes, you’ll also need to account for state and possibly local taxes when planning your taxes.
Roth IRA income and contribution limits
For individuals who make too much money to make direct contributions to a Roth IRA, a backdoor Roth IRA could be especially tempting. The contribution caps for the tax years 2023 and 2024 are arranged as follows. Note: By December 31 of the tax year in which a conversion occurs, a contribution made through this backdoor Roth IRA technique must be made.
Can Married Filing Separately Make Backdoor Roth Contributions? I YMYW Podcast
FAQ
Can you contribute to a Roth if married filing separately?
Who is not eligible for backdoor Roth IRA?
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Filing status
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Modified adjusted gross income (MAGI)
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Contribution limit
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Single individuals
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≥ $153,000
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Not eligible
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Married (filing joint return)
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< $218,000
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$6,500
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≥ $218,000 but < $228,000
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Partial contribution (calculate)
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≥ $228,000
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Not eligible
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What is the backdoor IRA limit for married filing jointly?
Can a married couple have separate Roth IRA accounts?