If your income is above the limits to contribute directly to a Roth IRA, there is a way around it. In this video, we’ll discuss Backdoor Roth IRA contributions and why they’re beneficial, how to do them, and some considerations to be aware of when doing so.

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Greg Corneille, CFP®, CRPC® is the founder of Choice Wealth Management, LLC; an independent registered investment advisory firm providing active investment management and financial planning services for individuals, families, business owners, and families with special needs individuals.

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A Backdoor Roth IRA is a method by which individuals can contribute to a Roth IRA even if they are above the income limits for direct contributions. This strategy allows high-income earners to take advantage of the benefits of a Roth IRA, including tax-free withdrawals in retirement, regardless of their income level.

The income limits for contributing to a Roth IRA are based on modified adjusted gross income (MAGI). For 2021, the income limit for single filers is $140,000 and for married couples filing jointly, it is $208,000. Individuals who earn more than these limits are not eligible to make direct contributions to a Roth IRA.

To get around these income limits, the Backdoor Roth IRA strategy involves making a non-deductible contribution to a traditional IRA and then converting that contribution to a Roth IRA. Since there are no income limits on contributions to a traditional IRA, this allows high-income earners to get money into a Roth IRA in a roundabout way.

Here’s how the Backdoor Roth IRA process works:

1. Make a non-deductible contribution to a traditional IRA: High-income earners first make a non-deductible contribution to a traditional IRA. For 2021, the annual contribution limit for traditional and Roth IRAs is $6,000, or $7,000 for individuals age 50 and older.

2. Convert the traditional IRA to a Roth IRA: After making the non-deductible contribution to the traditional IRA, the individual then converts that contribution to a Roth IRA. There are no income limits for Roth IRA conversions, so anyone, regardless of income level, can convert funds from a traditional IRA to a Roth IRA.

When performing the conversion, it’s important to be mindful of the tax implications. If you have any other traditional IRAs, SEP IRAs, or SIMPLE IRAs with pre-tax contributions, the conversion will be subject to taxes based on the proportion of pre-tax and after-tax money in all of your IRAs.

It’s also important to note that the IRS has specific rules and guidelines for the Backdoor Roth IRA strategy, so it’s advisable to consult with a financial advisor or tax professional to ensure compliance with the rules and to properly execute the strategy.

The Backdoor Roth IRA strategy can be a valuable tool for high-income earners who want to take advantage of the benefits of a Roth IRA. It allows individuals to make tax-free withdrawals in retirement, diversify their tax-advantaged accounts, and pass on tax-free assets to their heirs. However, it’s important to carefully consider the tax implications and consult with a professional before implementing this strategy to ensure it is appropriate for your financial situation.