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What is the Backdoor Roth IRA?

Let's talk about the Roth IRA, shall we? It's like a supercharged savings account for retirement, offering tax-free withdrawals down the road. I've already gushed about its perks in my Instagram feed.

But here's the kicker: Roth IRAs come with income limits.

For 2024, if you're filing as single and your adjusted gross income is under $161,000 (or $240,000 if you're hitched), you can stash away a maximum of $7,000. If you're making between $146,000 and $161,000 (or $230,000 to $240,000 if married), your contribution gets a bit of a trim.

Now, if you're rolling in the big bucks, clocking in at $161,000 or more ($240,000 if you're in the wedded bliss club), sorry, no Roth contributions for you. But fear not, there's a sneaky little workaround...

Enter the Backdoor Roth.

This nifty strategy lets high earners slide their contributions into a Roth IRA through a slick rollover maneuver. Here's how it goes down:

  1. Open a Traditional IRA account: Set yourself up with a Traditional IRA account, or dust off the one you've got lying around.

  2. Contribute to a Traditional IRA (max $7,000 in 2024): Instead of pumping cash into a Roth, stash it in your Traditional IRA. Quick note: make sure your Traditional, Rollover, or SEP IRA has a big fat $0 balance by year's end if you're planning a Backdoor Roth. Any lingering cash needs to be rolled into your 401(k) before you start squirreling away funds in your Traditional IRA.

  3. Hold tight while the money settles: Give it a few days for your cash to settle in the account. Hands off for now – no shopping sprees allowed. We'll get to that part after the conversion.

  4. Give your broker a call to roll it into a Roth IRA: Time to call your brokerage. Tell them you've dropped an after-tax sum into your Traditional IRA and you're ready to roll it over into your Roth IRA. They'll handle the heavy lifting to convert it for you.

  5. Invest within the Roth IRA: Now that your cash is cozy in its new home, put it to work. And if you're curious about where I park my funds, I'm happy to spill the beans on my portfolio.

Come tax time, you'll be swimming in paperwork. Keep an eye out for three key forms from your brokerage:

→ Form 5498: Showing the contribution to your Traditional IRA.

→ Form 1099-R: Detailing the distribution from your Traditional IRA, with Box 2b ticked off.

→ Another Form 5498: Revealing the contribution made to your Roth IRA.

Oh, and don't sweat it if those forms trickle in after April 15 – just make sure to report everything accurately on your tax return.

When filing your 1040 tax return, make sure to include Form 8606. Below, you'll find an example of a completed 8606 form assuming the Roth conversion took place in the 2024 calendar year:

Form 8606

Form 8606

Now, here's what Part 2 of the 8606 form will look like: Form 8606 Part II

Form 8606 Part II

If you've followed all the steps correctly (this is also a way to verify your tax preparer's work), line 4b on Form 1040 should be 0: Form 1040

Form 1040

In summary, here's a simplified visual:

Backdoor Roth

By the way, if you have any questions or suggestions regarding this article, you can definitely reach out to me!

Until next time!


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