Backdoor Roth IRA

The Backdoor Roth IRA is a process that enables you to invest in a Roth IRA even if your income is above the Roth IRA income limit of $153k.

It goes like this:

  1. Contribute to a Traditional IRA (as cash)
  2. Complete a Roth conversion (and then invest it)

This enables you to get money into a Roth IRA while bypassing the income limits of a Roth IRA.

It’s well worth taking advantage of the Backdoor Roth IRA as it enables you to invest $6,500 a year without being taxed on gains and withdrawals, unlike a taxable account. You can withdraw your contributions without any tax or penalty five years after your conversion, so it’s easier to access than 401(k) – but it’s still possible to access your 401(k) early. And you can withdraw your earnings tax and penalty after age 59.5 and five years after your first contribution to any Roth IRA.

One thing you need to be very careful about though is the pro-rata rule so that you don’t owe taxes on the money you’re converting in the Backdoor Roth process, more details in the

This applies when performing the Backdoor Roth IRA. If you have any other money in Traditional IRAs and other pre-tax accounts1 then you need to do something with this balance in the year you’re doing a Roth conversion of after-tax money, otherwise when you do your conversion, you will owe taxes on the proportion of the money you’re converting.

Worked example:

Say I’m doing a Backdoor Roth IRA, converting $6k from Traditional IRA to Roth IRA, but I already have $12k in Traditional IRAs from previous years. I will owe tax on 33% of the $6k I’m converting, because the $6k is 33% of the $18k total I have in traditional IRAs.

As for what to do with any of the money in these pre-tax accounts, the best option is probably to roll the money over into a 401(k), but you could convert the entire sum to a Roth IRA if you can afford to pay the taxes. Withdrawing the money is a possibility but not recommended because it results in taxes and penalties, and reduces your assets in a tax-advantaged position.

Helpful resources:

  1. How to Do a Backdoor Roth IRA [Step-by-Step Guide] | White Coat Investor
  2. What Is the Roth IRA 5-Year Rule? Withdrawals, Conversions, and Beneficiaries

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