Backdoor Rollover...

It's a way for high-income earners to take advantage of a Roth IRA. Unfortunately if you are a single tax filer and earning more than $137k as of 2019, you may not contribute to a Roth IRA. If you are a married couple filing jointly and making more than $203k, you may not contribute into a Roth IRA. However, what you can do is something known as a Backdoor Rollover. You can take your traditional IRA and convert some of the funds or all of the funds into a Roth IRA. There are however, tax implications when doing a conversion and therefore timing of the conversion becomes quite important.

This isn't a way for people to dodge taxes. The Government is always going to collect it's taxes one way or another. When you convert funds from your traditional IRA into a Backdoor Roth IRA you have to pay taxes at your federal income tax level on contributions that have not been taxed yet.

So for example: if you had $10k in a traditional IRA, $8k of which was pre-taxed and $2 was post taxed, you would have to pay taxes on 80% of whatever funds you rollover into your backdoor Roth IRA, since 80% of your traditional IRA is comprised of pre-taxed dollars.

Now, the interesting thing is that with a typical Roth IRA there are contribution limits. If you are below the age of 50 you may contribute up to $6k a year into the account. If you are above 50 you may contribute $7k a year. With a backdoor Roth IRA, there are no conversion limits. You can convert as much or as little as you want from a Traditional IRA into a Backdoor Roth IRA. Remember, however, you're converting from a Traditional IRA to a Backdoor Roth, so you have to pay taxes on your conversions. The tax implications always have to be weighed into the equation.

If you convert your entire Traditional IRA into a Backdoor Roth IRA and all those contributions were pre-taxed dollars, then you will pay tax on the entire amount. For example, If you have $100k pre-taxed in a traditional IRA, you will have to pay tax on the full amount if you convert all of it into a Backdoor Roth IRA. The conversions you make from a Traditional to a Backdoor will be counted as income so it may bump you up into a higher tax bracket if you experienced a high return off your investments. However, let's say you took a gap year or even lost your job, your income for the year has significantly been lowered, which may be a good time to take advantage of converting your traditional IRA into Backdoor Roth, since your income tax rate is severally lowered by not having a job. You are allowed one conversion a year, so once again timing is important. The question becomes: Do I want to do a full conversion this year or a partial conversion over the coming years? Something to ask not only yourself, but a tax professional.

As of now, this Backdoor method is available to all high-income earners and is completely legal. The Backdoor Roth IRA wasn't always available and may not be in the future. Tax codes can change like the weather, so make sure to talk to your tax accountant or a tax professional to see how you can take advantage of a Backdoor Roth IRA.

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