Backdoor Roth Conversion

A backdoor Roth conversion is a strategy to get around income limits for contributing to a Roth IRA by making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA. Here’s a step-by-step example of how to do it:

Scenario:

• Income: High enough that you're ineligible to contribute directly to a Roth IRA.
• IRA Balances: You have little or no money in other pre-tax IRAs (like a Traditional IRA or SEP IRA) to avoid the pro-rata rule complications.
• Annual Contribution Limit: For 2024, you can contribute $6,500 to an IRA if you’re under 50, or $7,500 if you’re 50 or older.

Steps:

1. Contribute to a Traditional IRA:
   Contribute the maximum annual amount to a Traditional IRA. Since you’re above the income limit for a tax deduction, this contribution will be non-deductible. Document it on IRS Form 8606 to avoid paying taxes on this amount twice.

   • Example: You contribute $6,500 to a Traditional IRA, and this is non-deductible.

2. Convert the Traditional IRA to a Roth IRA:
   Once the funds are in the Traditional IRA, convert the full $6,500 to a Roth IRA.

   • Since you already paid taxes on this non-deductible contribution, you’ll owe little to no additional tax on the conversion. However, if you had other funds in pre-tax IRAs, the pro-rata rule would apply, and you’d owe taxes on a portion of the conversion.

3. Report the Conversion:
   When you file your taxes, report both the non-deductible contribution to the Traditional IRA and the Roth conversion on IRS Form 8606. This will show the IRS that you’ve already paid taxes on the contribution and confirm the conversion.

Example Tax Reporting:

• Step 1: Report the $6,500 contribution as a non-deductible Traditional IRA contribution on Form 8606.
• Step 2: Report the Roth conversion of $6,500 on the same form, ensuring that taxes are correctly calculated.

Following this method lets you get funds into a Roth IRA without contributing directly and without exceeding income limits. Remember, having other pre-tax IRA funds can complicate the tax situation, so it’s best to consult us if you’re unsure.