For some Americans, there’s still time in early 2024 to do a Backdoor Roth IRA for 2023.
A 2023 in 2024 is what I refer to as a Split-Year Backdoor Roth IRA. I previously blogged about the Split-Year Backdoor Roth IRA here:
I blogged about the Backdoor Roth IRA here and here
This video, the show notes, and any comments are for educational purposes only. They do not constitute tax, legal, financial, and/or investment advice for any person. Consult with your own advisors regarding your own matters….(read more)
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If you missed the deadline to contribute to a Roth IRA for the current tax year, don’t worry – it’s not too late to take advantage of the benefits of a backdoor Roth IRA for 2023! A backdoor Roth IRA is a strategy that allows high-income earners to bypass the income limits for contributing to a Roth IRA by making non-deductible contributions to a traditional IRA and then converting it to a Roth IRA.
One of the main benefits of a Roth IRA is that all earnings and withdrawals are tax-free, making it a powerful tool for retirement savings. However, there are income limits that restrict who can contribute directly to a Roth IRA. For 2023, individuals with a modified adjusted gross income (MAGI) of more than $144,000 (or $229,000 for married couples filing jointly) are not eligible to contribute to a Roth IRA.
If you exceed these income limits but still want to take advantage of the benefits of a Roth IRA, the backdoor Roth IRA strategy is a great option. Here’s how it works:
1. Make a non-deductible contribution to a traditional IRA: Since there are no income limits for contributing to a traditional IRA, high-income earners can make non-deductible contributions regardless of their income level.
2. Convert the traditional IRA to a Roth IRA: After making the non-deductible contribution to a traditional IRA, you can then convert it to a Roth IRA. This conversion will be subject to income tax, but since the contribution was already made with after-tax dollars, the tax impact should be minimal.
It’s important to note that there are some potential pitfalls to the backdoor Roth IRA strategy, including the pro-rata rule that can limit the benefits of the conversion for individuals with other traditional IRA accounts. Before proceeding with a backdoor Roth IRA, it’s recommended to consult with a financial advisor or tax professional to ensure that you understand all the rules and potential implications.
Despite the potential complexities, a backdoor Roth IRA can be a valuable tool for high-income earners looking to boost their retirement savings. By taking advantage of this strategy, you can enjoy the benefits of tax-free growth and withdrawals in a Roth IRA, even if you exceed the income limits for direct contributions.
So if you missed the deadline to contribute to a Roth IRA for 2023, don’t fret – it’s not too late to utilize the backdoor Roth IRA strategy and supercharge your retirement savings!
Thanks, Sean for the video! I read your blog about Jennifer's example with an existing separate Traditional IRA amount, which showed a bad case for Roth IRA conversion. I have a question about the pre-existing Traditional IRA. Does this existing Traditional IRA you indicated refer to the same provider (where you made nondeductible contribution and would like to convert to Roth IRA), or does it mean all traditional IRA accounts (with different providers) one person can have? In my case, I have one Traditional IRA account with TRowPrice that was opened in 2018, and at that time, the contribution was tax-deductible because my income was low. In 2022, my income exceeded the Roth IRA contribution threshold, so I made a nondeductible contribution into a Traditional IRA account I opened with Fidelity, however, I didn't get a chance to convert that nondeductible amount into Roth IRA in 2023. I was hoping that I could convert that nondeductible amount before the 2023 tax file deadline, will my Traditional IRA account with TRowprice opened in 2018 affect the Roth IRA conversion of my nondeductible contribution in Fidelity account? Or do I have to account for the traditional IRA amount I have in Trowprice to calculate the non-taxable basis？ Many thanks in advance!
Hi Sean – thanks a lot for this video. I have 2 questions.
1. If you do a 2023 roth conversion now in early 2024, the conversion will be reported on your 2023 or 2024 return.
2. For a split year Roth conversion, can you do a single conversion instead of 2.
Thanks
Hello Sean. I did my first backdoor ROTH this year. I opened a traditional IRA account in 1/15/2024 made $6500 contribution for tax year 2023, $7000 contribution for year 2024 and then did ROTH conversion of the full amount as soon as it was available from my traditional IRA on 1/18/2024. I have two questions: Am I only completing ONE form 8606 Nondeductible IRA for year 2023 for my income tax return I am filing this year by 1/15/2024? Do I Then complete another Form 8606 next year to show it is not taxable? 2nd question: That $6500 that was in Traditional IRA for 4 days earned $2.89. How do handle that?
Thanks for the great video! If I do my backdoor Roth contribution for 2023 now, I won't get my tax forms until May (through Vanguard). Do I need to amend my taxes if this is the case? If I can wait until next year to file the tax forms, it will show that I converted 13,500 in 2024 (6,500 for 2023 and 7000 for 2024). Will this be an issue? The tax part has been overwhelming for me.
Excellent content. Thanks, Sean!
Thanks for the info!