High income earners that wish to get funds into a Roth IRA must utilize the “backdoor.” But can you do it every year? Adam Bergman answers that burning question.
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IRA Financial was founded by Adam Bergman, a former tax and ERISA attorney who worked at some of the largest law firms. During his years of practice, he noticed that many of his clients were not even aware that they can use an IRA or 401(k) plan to make alternative asset investments, such as real estate. He created IRA Financial to help educate retirement account holders about the benefits of self-directed retirement plan solutions.

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A Backdoor Roth is a popular strategy for high-income earners looking to take advantage of the tax-free benefits of Roth IRA contributions. However, many people are left wondering whether they can do a Backdoor Roth every year.

The answer is yes, but with some caveats.

First, let’s look at what a Backdoor Roth is. Traditional IRA contributions up to a certain limit are tax-deductible, meaning you can deduct them from your taxable income and lower your overall tax bill. But high-income earners may not be eligible for the tax deduction, and may still want to contribute to a Roth IRA due to its tax-free growth and withdrawals.

This is where the Backdoor Roth comes in. It involves making a non-deductible contribution to a traditional IRA, then converting it to a Roth IRA. Since the contribution is non-deductible, there are no tax implications for the conversion. The end result is a tax-free Roth IRA contribution.

Now, let’s explore whether you can do this every year.

The good news is that there is no limit to the number of times you can do a Backdoor Roth conversion. You can do it every year, as long as you meet the eligibility requirements for both a traditional IRA contribution and a Roth IRA conversion.

The eligibility requirements for a traditional IRA contribution depend on your age and income. If you are under age 50, you can contribute up to $6,000 per year. If you are over age 50, you can contribute an additional $1,000 catch-up contribution, for a total of $7,000 per year.

The eligibility requirements for a Roth IRA conversion depend on your income. There is no income limit for converting a traditional IRA to a Roth IRA, but there is an income limit for making direct Roth IRA contributions. As of 2021, the income limit for single filers is $140,000, and for married filers is $208,000.

If you meet the eligibility requirements for both a traditional IRA contribution and a Roth IRA conversion, you can do a Backdoor Roth every year.

However, there are some things to keep in mind. First, you may owe taxes on any earnings in your traditional IRA account at the time of conversion. It’s best to consult with a tax professional to ensure you understand the tax implications of a Backdoor Roth conversion.

Additionally, if you have other traditional IRA accounts, the pro-rata rule may come into play. This rule takes into account all of your traditional IRA accounts when determining the tax implications of a Backdoor Roth conversion. If you have a significant amount of pre-tax money in your traditional IRA accounts, a Backdoor Roth conversion may not be the most tax-efficient strategy.

In conclusion, you can do a Backdoor Roth every year, as long as you meet the eligibility requirements for both a traditional IRA contribution and a Roth IRA conversion. However, it’s important to understand the tax implications and to consult with a tax professional before proceeding.