Backdoor Roth IRA Strategy

backdoor roth IRA

Backdoor Roth IRA Strategy

The year 2010 saw high income earners gain access to depositing money into Roth Individual Retirement Accounts (IRA), a vehicle that allows for compounding growth and tax avoidance upon withdrawal once they pass age 59 ½. In 2018, for example, someone who makes more than $130,000 filing single or $199,000 filing married, is not able to contribute to a Roth IRA.

The government needed tax dollars after the 2008 Great Recession, or Credit Crisis if you want to call it that. In an effort to increase revenues by having savers transfer some or all of their pre-tax traditional IRA money into a Roth IRA and pay income taxes on the amount transferred, the government saw a nice revenue increase because of this opportunity.

This transfer gateway of adding money to a Roth IRA became a permanent option for all traditional IRA account holders, not just high-income earners. But for high income earners it was the only way they could add or create a Roth IRA.

For savers who had exhausted their traditional IRAs in transfers to Roth IRAs, they looked around for additional opportunities to utilize a Roth IRA for compounding and withdrawing tax free. In addition, they potentially wanted to utilize these accounts to pass money tax free to beneficiaries, most of whom where a younger generation and able to stretch out the withdrawals over their longer lifetimes.

A strategy now commonly referred to as “Backdoor Roth IRA”, became a popular topic in personal finance articles beginning in 2011. This strategy was aimed at high income earners precluded from making Roth IRA deposits because of income limits. It featured making a non-deductible IRA deposit ($5,500 in 2018) and then converting it to a Roth IRA because there were no income limits on conversion amounts.

If there is no growth or a loss in the non-deductible traditional IRA, there is no income tax to pay on conversion provided the converter does not have other traditional IRA money which would be pro-rated and subject the non-deductible deposit to further taxation.

As the Backdoor Roth IRA strategy became more popular, high income earners started rolling over IRAs into their 401k/403b accounts, if they accepted rollovers, prior to making a non-deductible IRA deposit and then converting it to a Roth IRA, to preclude double taxation.

This Backdoor Roth IRA strategy can be tricky, and savers must follow the rules and understand the tax consequences of this kind of transaction. Further advice is available from personal finance advisors and tax accountants for individuals. We urge you to double check before proceeding.


Anna Sergunina
Anna Sergunina

I'm Anna Sergunina, CFP®, President & CEO at MainStreet Financial Planning, Inc. My passion lies in serving others through financial planning, helping clients achieve their dreams like buying a home, saving for education, or retiring early. With over two decades in the industry and a CFP designation since 2009, I'm dedicated to excellence and continuous growth. Beyond work, I cherish moments with my son Liam, prioritize self-care, and engage in content creation for my Money Boss Parent Podcast and Money Library blog.

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