Many investors are enticed by the long term benefits of a Roth IRA. Unfortunately for those who do participate in an employer sponsored retirement account, such as a 401k, and earn a high annual income (over $116,000 for single filers and $183,000 if you are married, filing jointly), you are unable to make a Roth contribution. How to Make Backdoor Roth IRA contributions
Fortunately, there are ways around this. There are steps outlined below that can be taken, which would allow a high income earner to move after tax funds into their Roth IRA. This is only possible because there are currently no income limitations for those who are looking to convert to a Roth IRA.
Step 1 – Determine whether or not there are other pre-tax IRA’s
Step 2 – If there is an existing pre-tax IRA, roll this account into a 401k (if available) to avoid the IRA aggregation rule. It is important to check whether or not the 401k allows for a rollover. You are also only able to roll over pre-tax funds.
Step 3– Contribute to a non-deductible IRA (You must have earned income for the year)
Step 4 – Invest funds in the non-deductible IRA
Step 5 – Keep invested (this is the step where you/CPA must be aware of the step transaction doctrine)
Step 6 – Convert to a Roth IRA
A CPA should be consulted prior and along the way as there are important obstacles to be prepared for. Obstacles such as the IRA aggregation rule and the “Step transaction doctrine.”
It is worth noting that this opportunity might not exist forever and the new administration may change the rules.
William N. Pugh, CFP®
How to Make Backdoor Roth IRA Contributions