Total Clarity: What Is A “Backdoor” Roth IRA?

Jeanne Tackett |

You’ve probably heard of a Traditional IRA and a Roth IRA, but have you heard of a Backdoor Roth IRA? It is important to have an understanding of your retirement portfolio and the different opportunities you have for your retirement. Continue reading to learn about a backdoor IRA and how you could use one to your advantage.

A Backdoor Roth IRA is a term used for a method for high-income taxpayers to fund a Roth IRA if their income exceeds the limit on IRS sanctioned contributions. To clarify, a Backdoor Roth IRA is not a type of account, just a method of converting traditional IRAs or 401(k)s into Roth IRAs.

Backdoor IRAs are not to be mistaken as a way to escape taxes. When moving money from a traditional IRA to a Roth IRA, you still owe taxes on the amount transferred. Although you do not owe any taxes when withdrawing money from your Roth IRA.

This method could be an option for you if your modified adjusted gross income is in the six-figure range. Under the regular rules, high-income earners are not able to open or fund Roth IRAs. Traditional IRAs do not have these types of limits. The Backdoor Roth IRA has become a popular way for high-income earners to take advantage of the Roth IRA tax benefits.

There are several ways to create a Backdoor Roth IRA. The primary method is to contribute to an existing Traditional IRA and have the funds rollover to a Roth IRA. You can also convert the account itself from a Traditional IRA to a Roth IRA. Another way to do this is to make after-tax contributions to a 401(k) and roll it over to a Roth IRA.

One major benefit of doing a Backdoor Roth IRA is Roth IRAs do not have required minimum distributions, meaning the funds in the account can grow tax-deferred for as long as the account owner is alive. You can also choose when you begin taking payments, or you could leave it untouched for your beneficiaries. Another benefit is the significant savings on taxes over decades from non taxable Roth IRA distributions.

If you are a high-income taxpayer and looking to receive more tax benefits, consider a Backdoor Roth IRA. Here at Total Clarity Wealth Management, we want to help you make the best decision for your retirement portfolio and financial well-being.















Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.