A Backdoor Roth IRA is a strategy that allows high-income earners who exceed Roth IRA income limits to contribute to a Roth IRA indirectly. The process involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA. This is legal and widely used, though the pro-rata rule can complicate matters if you have existing pre-tax IRA balances.
Backdoor Roth IRA
Definition
A Backdoor Roth IRA is a strategy that allows high-income earners who exceed Roth IRA income limits to contribute to a Roth IRA indirectly. The process involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA. This is legal and widely used, though the pro-rata rule can complicate matters if you have existing pre-tax IRA balances.
Example
A single filer earning $200,000 (above the Roth IRA income limit) contributes $7,000 to a non-deductible Traditional IRA, then immediately converts it to a Roth IRA. If they have no other IRA balances, the conversion is essentially tax-free.
Key Points
- 1Allows high earners to access Roth IRA benefits
- 2Two-step process: contribute to Traditional IRA, then convert
- 3Pro-rata rule applies if you have existing pre-tax IRA funds
- 4No income limits on Roth conversions
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