What is a Backdoor Roth IRA?

How do I make a backdoor Roth IRA contribution?

A common question our team of fee-only fiduciary financial advisors in the Wayne, PA area gets is what is a backdoor Roth IRA? A backdoor Roth IRA strategy can be particularly beneficial for high-income earners who are not eligible to contribute to a Traditional or Roth IRA due to IRS contribution limits but are looking to maximize their yearly tax-advantaged retirement contributions.

The backdoor Roth IRA strategy allows you to make a non-deductible, after-tax contribution to a Traditional IRA and then convert it to a Roth IRA, effectively bypassing the income limits and allowing the investments to grow tax free during your lifetime.

There are a few key considerations to keep in mind when using a backdoor Roth IRA strategy. First, you must be careful to avoid the pro-rata rule. The pro-rata rule requires you to consider all your pre-tax IRA assets when making a conversion to a Roth IRA, which can result in tax bill if you have pre-tax Traditional IRA assets.

To avoid the pro-rata rule, you can rollover existing pre-tax Traditional IRA assets into an employer-sponsored plan, avoid making pre-tax contributions to a Traditional IRA, or convert pre-tax Traditional IRA assets into a Roth IRA (ideally, in a low income year). If your employer’s plan includes a Roth 401k option, you could shift some of your current contributions or make additional contributions to the Roth 401k.

The One Day In July office in Wayne, PA provides investment management services as fee-only fiduciary financial advisors to the greater Philadelphia area, the Main Line, and surrounding communities including Villanova, Radnor, St. Davids, Wayne, Strafford, Chesterbrook, Devon, Berwyn, Paoli, Malvern, King of Prussia, Valley Forge, Havertown, and more.

If you would like to complete a Backdoor Roth IRA, contact us today to set up a free consultation. We can meet in person if you're in the area or set up a phone call or Zoom meeting if you prefer.