How Does a Back-Door Roth IRA Contribution Work?

July 29, 2020 | Josh Zorger, CFP®, Fortitude Private Wealth

Individuals who are saving for retirement are looking for opportunities for increasing their retirement savings. Retirement account savings grow tax-deferred and in some circumstances have a tax benefit on contributions, such as with a 401(k) plan. A Roth IRA features tax-deferred growth and provides the benefit of no taxation on earnings when distributions are withdrawn from the account. ¹

A common question that I receive is, “Is my income too high for me to contribute to a Roth IRA”? The answer to that question is no, well not exactly. For individuals who file their taxes as Single, the Roth IRA Phaseout for a direct contribution begins at $124,000 for 2020. For married individuals filing Jointly, the Roth IRA Phaseout for a direct contribution begins at $196,000. This phaseout amount is based upon the Modified Adjusted Gross Income reported.

Though these are the income limits for making a direct contribution to a Roth IRA, there is another way to make a Roth IRA contribution. There are no income limits for contributing to a Traditional IRA. For 2020, the maximum Traditional IRA or Roth IRA contribution is $6,000. For individuals who are age 50 or older, the maximum contribution is $7,000.

Individuals that have an income amount that is above the Roth IRA limits are eligible to make a Back-Door Roth IRA contribution. This is accomplished by making a Traditional IRA contribution and then converting the Traditional IRA to a Roth IRA. There are certain features of this process that you would want to be aware of before trying on your own. I would strongly suggest consulting with a professional financial advisor or tax advisor for assistance with this process.

Keep in mind that Roth IRA conversions are required to be completed before 12/31 of each year and there is no income limit on who can convert Traditional IRA assets to a Roth IRA. It is important for each investor to have a specific investment objective and long-term plan for each of their different retirement accounts. Planning Back-Door Roth contributions and Roth IRA conversions should be an important part of this plan.

This information should be used for educational purposes only and is not intended to be specific investment planning, retirement planning or tax planning advice. We recommend that you consult with a professional tax advisor or qualified plan consultant before implementing any of the options presented.

¹ If a distribution is taken from a Roth IRA Account before the owner reaches the age of 59 ½ and before the account is five years old, the earnings may be subject to taxes and penalties. 

Josh Zorger, CFP®, is the founder and president of Fortitude Private Wealth in Carmel, IN.

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