What is a “Backdoor” Roth IRA?
Some people earn too much to contribute directly to a Roth IRA, but there is a legal workaround often called the “backdoor” Roth. It isn’t a special account or a loophole — it is simply a two-step process using existing rules.
Here’s how it generally works:
You make a non-deductible contribution to a traditional IRA.
You then convert that amount to a Roth IRA.
The end result is that the money ends up in a Roth IRA, even if your income is above the normal contribution limits.
A few things to know:
The amount you contribute still counts toward your annual IRA contribution limit.
You need earned income to make the original contribution.
If you have any pre-tax IRA balances, the IRS applies the pro-rata rule, which may cause part of the conversion to be taxable.
The conversion must be reported correctly on your tax return to avoid double taxation.
Because conversions can affect your taxable income for the year, it is important to work closely with a qualified tax professional and a financial professional to plan the timing and reporting of each step. Proper coordination helps ensure the conversion doesn’t create unexpected tax consequences.
Each week, I share a clear, bite-sized tax insight straight from my continuing education so you can stay informed without sifting through tax changes.
Next week, we dive into the multifaceted world of real estate.
Thanks for reading,
Brandy Sparkman, EA
I’ll keep learning so you can stay focused on what you do best.
See you next week for another Tax Minute.
