Backdoor Roth Contributions
I’ve been reading about Backdoor Roth Contributions for folks that have AGIs that are too high to contribute to a ROTH IRA but they all mention making a non deductible traditional IRA contribution and then converting to a Roth IRA in the same year. However, I have large traditional IRAs funded with pretax contributions. Can I just make a $5,500 deductible contribution to a traditional IRA and then convert $5,500 from my traditional IRA to my Roth IRA in the same year? The $5,500 deduction for the contribution to the traditional IRA would just be offset with having to report $5,500 of conversion income. Am I missing something?
Permalink Submitted by Alan - IRA critic on Fri, 2014-10-17 21:52
Yes. While the end result of your two scenarios is the same, most people with MAGI too high for a direct Roth contribution CANNOT deduct their contribution because either themself or their spouse is a participant in a work place retirement plan. Therefore, they have no deduction to offset the tax on their conversion. But they can eliminate the tax on the conversion by eliminating any pre tax IRA amount by either not having a prior TIRA balance or by rolling it into their current employer plan. Then then end up with a Roth balance of 5500 just as if they made a direct Roth contribution.
Permalink Submitted by Linda Doss on Tue, 2014-10-21 15:08
I am not a participant in a work place retirement plan, nor do I have a spouse that is so are you saying I can make a $5,500 deductible traditional IRA contribution and then convert it to a Roth IRA in the same year, thereby having the deduction offset the conversion income?
Permalink Submitted by Alan - IRA critic on Tue, 2014-10-21 18:18
Yes. Or if you want to shift taxable income to next year, you can hold off on the conversion until January. Then you get the deduction this year and the taxable income next year.
Permalink Submitted by Linda Doss on Tue, 2014-10-21 19:36
Thanks for the quick replies. I think I’ll use this strategy as long as I can as I prefer the Roth to the traditional IRA.