Many a high-income professional who earns too much to make a direct Roth IRA contribution will need to use the backdoor to make a Roth IRA contribution of $6,500 or $7,500 (if age 50 or over). Although it can be straightforward, it can also be unnecessarily complex.
This blog post was originally a forum post by “Peds,” a prolific participant and moderator on the White Coat Investor Forum. As someone who fields multiple questions a day on the topic at the end of one year and beginning of the next, I felt it would be great to push this list of frequently asked questions about the backdoor Roth to the general public.
If you have any questions, they’re likely answered multiple times in the blog posts featured at the beginning. Any lingering questions — over 40 of them — are answered (again, in many cases) in the FAQ that follows.
You make too much money, fancy pants high earner, to get a tax deduction from a traditional IRA contribution. However, you can still make a non-deductible contribution.
Nothing changes on your taxes, and you have more money in an IRA now. Good, it’s protected.However, once it comes time to remove that money, the gains are taxed as income.
So you got no deduction on the way in, you did get tax free growth over the years, but the gains are taxed on the way out. Not the most efficient choice.Now, you also make too much money to directly contribute to a Roth IRA.
Some history: Congress changed the law >10 years ago that removed the income restriction on conversions which was the holdup in the past. Now, you can contribute to the traditional IRA, the contribution is nondeductible, and then you can convert that money to a Roth IRA without any restriction based on income.