The Back-Door Roth Strategy and Spousal Beneficiaries: Today’s Slott Report Mailbag

Thursday, October 19, 2023

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport

Question:

I earn too much money and can’t do a Roth IRA. I have heard about the back-door Roth IRA strategy for those who earn more than the allowable contribution for the Roth IRA where they contribute to a traditional IRA and then roll over to a Roth IRA. Can this “back-door” analysis be used for the sole proprietor with no employees by contributing to a SEP IRA and then converting to a Roth IRA?

Answer:

The back-door Roth IRA strategy is often used by those who have incomes too high to contribute directly to a Roth IRA. With this strategy, a contribution, usually nondeductible, would be made to a traditional IRA and then converted to a Roth IRA. Unlike Roth IRAs, traditional IRAs have no income limits for making contributions.

The same strategy could be done with a SEP IRA contribution by a sole proprietor. The SEP contribution could be made and then converted to a Roth IRA. The individual would need to pay taxes on the converted funds.

Question:

My spouse died last month, and she had a Roth IRA. I have read that I can combine it with my own Roth IRA. Could my credit union do a regular distribution and then roll the money over into my Roth IRA?

Answer:

Our condolences on the death of your spouse. As a spouse beneficiary, you can do a spousal rollover and combine her Roth IRA funds with yours. This transaction can be done in a couple of different ways. While a 60-day rollover would be possible, it would likely be easier to have your credit union assist you in doing a direct transfer from the Roth IRA you inherited from your wife to your own Roth IRA.

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