Two Cautions When Doing a Backdoor Roth Conversion

By Sarah Brenner, JD
Director of Retirement Education
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You might be thinking about contributing to a Roth IRA. One big hurdle to making these contributions is the fact that there are income limits that make high income individuals ineligible. For 2024, the phase out range for eligibility for Roth IRA contribution is between $230,000 – $240,000 for those who are married filing jointly and between $146,000 – $161,000 for single filers.

If you are a high earner, you may be able to get around the pesky income limits by using the backdoor Roth IRA conversion strategy. To do this, you make a nondeductible traditional IRA contribution and then convert those funds to a Roth IRA. This strategy works because there are no income limits for traditional IRA contributions or Roth IRA conversions like there are for contributions made directly to a Roth IRA.

When doing a backdoor Roth IRA conversion, here are two important cautions to keep in mind:

1. You or your spouse must have earned income – such as wages or self-employment income. The backdoor Roth IRA conversion strategy starts with a nondeductible traditional IRA contribution. This contribution is subject to all the normal IRA contribution rules. One of these rules is that earned income is required. However, a non-earning spouse can use a working spouse’s earned income to make her own IRA contribution.

Example 1: Jose is age 75, still working and married. His wife is age 73 and retired. Jose will earn $25,000 in 2024. Assume their joint income exceeds the Roth IRA contribution limits. Jose can contribute $8,000 (including the $1,000 catch-up amount) to his nondeductible IRA, and his wife can contribute $8,000 to her nondeductible IRA even though she has no earnings. She can qualify using John’s earnings as long as they are married and file a joint tax return. Once they each contribute to their nondeductible traditional IRAs, they can each convert those IRAs to Roth IRAs shifting a combined $16,000 to their respective Roth IRAs.

2. Your backdoor Roth IRA conversion may be subject to the pro-rata rule.  A backdoor Roth IRA conversion is considered a distribution from the traditional IRA and a conversion deposit to the Roth IRA. Whenever you take a distribution from one of your traditional IRAs, all of your owned traditional IRAs, including SEP and SIMPLE IRAs, are included in a pro-rata calculation that determines how much of your distribution is tax-free. When any of your IRAs contains both nondeductible and deductible funds, then each dollar withdrawn from any IRA will contain a combination of tax-free and taxable funds based on the percentage of after-tax funds to the entire balance in all your IRAs.

Example: Grace, age 37, is single, and her income is too high for her to contribute directly to a Roth IRA for 2024. She decides to use the backdoor Roth IRA conversion strategy. She makes a non-deductible contribution of $7,000 to a traditional IRA and then converts the funds to a Roth IRA. Grace also has a SIMPLE IRA from a previous employer. Grace’s backdoor Roth IRA conversion will be partially taxable because the pro-rata rule will apply.