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What is a backdoor Roth IRA?

Updated: Mar 27

For those who earn over the income limits, a backdoor Roth IRA is a way to contribute still.


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Sections:

+ What is a backdoor Roth IRA?

+ Who can do a backdoor Roth IRA?

+ How do you do a backdoor Roth IRA?


What is a backdoor Roth IRA?

A backdoor Roth IRA is another way to contribute to your Roth IRA if you are above the income limits. This is completely legal as of January 2022 (there was legislation proposed to get rid of this workaround, however, it did not pass).


A Roth IRA is a very attractive account because you put in post-tax dollars into the account and future earnings are tax-free. Because this is such a huge benefit, there are limits to who can contribute to a Roth IRA. For more information about Roth IRAs, check out the post where we compare Roth IRAs vs Roth 401Ks vs 401Ks.



Who can do a backdoor Roth IRA?

The only people who should engage in a backdoor Roth IRA are anyone above the income limits for contributing. As of 2022, contributions start being reduced or "phased out" starting at $129,000 for an individual. Anyone who earns more than $144,000 will not be able to contribute to a Roth IRA at all. If you're married and filing jointly, contributions start being reduced at $204,000 and any household income greater than $214,000 will not be able to contribute to a Roth IRA at all.


If your pre-tax income is lower than the amounts stated above, you can just contribute to your Roth IRA directly and you do not need to do a backdoor Roth IRA.


How do you do a backdoor Roth IRA?

To take advantage of this conversion, open up a traditional IRA account and make a post-tax contribution (using your after-tax income). For 2022, the maximum contribution is $6,000 per year or if you're 50 or older, the contribution is $7,000 per year. Once you have made a contribution to the account, convert it into a Roth IRA. You can usually do this with a form found on your account or by reaching out to customer support for help. And voila, you have completed a Roth IRA conversion!


Thinking of other ways to protect your retirement plan? Schedule a 1 HR financial coaching session with me, where we will develop a personalized financial plan to achieve your financial goals.




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