At a Glance: How to Set Up a Backdoor Roth IRA
- Some retirement savers cannot contribute to a Roth IRA because their income exceeds the limits for these accounts, but there is a loophole in the law that may allow them to use one anyway.
- The loophole involves opening a traditional IRA, which are available to people of all incomes, and later converting it to a Roth IRA.
- Savers who have previously deducted contributions to a traditional IRA will have to pay back those tax savings upon converting the account to a Roth IRA, as well as taxes on the previous earnings.
You may think a high income will shut you out of Roth IRA eligibility, but there’s another way in: a backdoor Roth IRA. And it can save you thousands of dollars in taxes.
Roth IRAs are retirement accounts that allow you to sock away money you’ve already paid taxes on. One of their big selling points is that you get to withdraw that money — and any investment gains — tax-free when you retire. So if you’re in, say, the 15% tax bracket now but expect to be in the 28% tax bracket when you retire, a Roth IRA can save you a ton of money later in life.
Here’s the thing, though: High earners can’t contribute to Roth IRAs. For 2017, the government allows only those people with adjusted gross incomes below $196,000 (married filing jointly) or $133,000 (single) in the front door. (Check the Roth IRA income limits.)