Tax
backdoor Roth IRA
A backdoor Roth IRA is a two-step method for people whose income is too high to contribute to a Roth IRA directly. They contribute to a traditional IRA, then convert it to a Roth IRA.
A backdoor Roth IRA is a method people use when their income is above the limit for a direct Roth IRA contribution. The IRS says your Roth IRA contribution might be limited based on your filing status and income. It also says that regardless of your income, you may be able to convert amounts from a traditional IRA into a Roth IRA. The backdoor joins those two facts.
The steps: contribute after-tax money to a traditional IRA, then convert it to a Roth IRA. You report both on Form 8606, which the IRS says is used for nondeductible contributions to traditional IRAs and conversions to Roth IRAs.
For example (round numbers): you contribute $7,000 to a traditional IRA and do not deduct it. You convert it soon after. If you have no other IRA money, little of the $7,000 is taxed. If you also hold a large pre-tax IRA, part of the conversion can be taxable, because Form 8606 looks at the total value of all your traditional IRAs.
Why it matters: the other IRA balances can change the result. Rules are technical and change. Ask your CPA before you try it.
Read our guide to Roth conversion questions.
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