What is a back door Roth contribution?

Very simply, to make a Roth IRA contribution each year your income has to be below a certain IRS threshold, for 2024 those limits (for full roth contributions) were:

• Married Filing Jointly: < $230,000
• Married Filing Separately: <$10,000
• Single / HOH: <$146,000

But what if you are a higher earner, are there any options?

The answer is maybe.  It’s called a “back door roth” contribution.  However, there are still rules you need to be aware of.  Here is the typical sequence of events:

1.  You make a “non-deductible” traditional IRA contribution prior to your tax filing deadline. (ie.  $7000)
2.  My preference is to wait until after tax filing season and then you do a “roth conversion” and move that to your Roth IRA. (move $7000 from your IRA to Roth)
3.  Since you did not deduct the IRA contribution on your tax return, your basis is exactly what you first contributed ($7000) with no taxable conversion to report.
4. With all that said there are some important rules to understand and tax forms to file:
   1. This only works if you don’t have any other IRA accounts (ie.  no rollover ira’s or other traditional IRA’s)
      1. Why?  Because the tax code requires you to aggregate the complete value of “all” IRA’s to determine if a portion of that conversion is considered taxable income.
      2. If you had other IRA’s (ie. a $100k rollover IRA from old employer 401k), then your aggregate IRA balance is $100k rollover + your $7000 non-deductible contribution.
      3.  $7000/$107k = 93.4% of that $7k would have to be shown as income.  Not beneficial at all.
   2. Tax Form 8606 has to be filed with your tax return to not only show the “$7k non deductible contribution” but also in the subsequent year to show the Roth Conversion.
   3. Even if you don’t end up converting, always a good idea to file the 8606 form each year to show your basis in the traditional IRA in case you wanted to convert at a later date.