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The Backdoor Roth IRA

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Retirement Planning

June 22, 2016

The Backdoor Roth IRA

Learn if you’re eligible and how to utilize this strategy.

‍Current retirement account guidelines allow for traditional IRA owners to convert to a Roth IRA and pay the taxes up front on a portion or all of the funds within a retirement account. While the government places income limits on the ability to make direct contributions to a Roth account, conversions from a traditional to a Roth do not have such limitations.

So, for single individuals who will earn over $132,000 this year or married couples who will earn a combined annual income of over $194,000 this year, it would appear that placing new money into a Roth simply isn’t possible. But there is a not so well-known strategy called the backdoor Roth IRA. For those who are phased out of making direct Roth IRA contributions, this might be a retirement planning choice worth at least exploring.

‍What is the Backdoor Roth IRA?

‍A backdoor Roth IRA is a strategy that allows those who earn above the Roth IRA contribution income limits set by the government to place new money into a Roth account. The benefits of a Roth IRA include no required minimum distributions and tax-free growth for a lifetime. The contributions within this strategy would not be direct of course, hence the backdoor term, but this workaround approach has been beneficial to countless many.

‍Are You Eligible?

‍To be eligible to take advantage of the backdoor Roth IRA strategy, you must be able to make a contribution to a traditional IRA. So not only is earned income required, but there is an age limit of 70.5 at the end of the year for which the traditional IRA contribution is being made. Note that contributions made to an employer-sponsored plan do not impact eligibility, however it could impact deductibility.

Obviously, direct Roth IRA contributions are always the way to go if you qualify by having earned income and being within the limits set forth by the government. But if this option isn’t available, why not check out the backdoor Roth? This strategy could complement your overall retirement plan and potentially bring you closer to the retirement lifestyle you’ve been planning.

The rules associated with Roth IRAs are forever changing so it's important to stay up to date. Jeff Rose of Good Financial Cents provides an overview the top 7 Roth IRA rules for 2017: Read it here.

‍Is Time Running Out?

‍According to MarketWatch by Dow Jones & Co., the backdoor Roth IRA might be short lived. Earlier this year, President Obama included in his 2017 proposals a rule that would affect the ability to utilize the backdoor Roth strategy. It would prevent non-deductible contributions from being converted to a Roth. There are additional details within the proposal, and while these changes aren’t expected to happen immediately or even this year, this change is a possibility.

It is always best to consult your financial advisor and tax advisor to discuss integrating this strategy into your overall financial situation. There are other complex details that make up the backdoor Roth strategy.

If you have questions about whether the backdoor Roth IRA strategy could benefit you, schedule a 15-minute call with one of our advisors.

Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.

‍Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.

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