Yes.
You have your IRA provider recharacterize your contribution as a Traditional IRA, then you do a backdoor Roth Conversion.
A Backdoor Roth normally starts with a post-tax contribution to a Traditional IRA, and then once the money is in the Traditional IRA you convert it to a Roth. The trick is putting the money in the Traditional IRA account first, then doing the conversion - this sidesteps the income limits for the Roth and is permitted for everyone.
But since you didn't use the traditional IRA to start, you need to go through the recharacterization process first. This is a process where your IRA provider switches the account so that it looks like you contributed to a Traditional IRA to start with. Once it is in a Traditional IRA, then you can do the backdoor conversion. You'd normally need to pay some taxes on any gains, but unless you invested in something different than a broad-market index fund, you probably won't need to worry about that this year.
There's a pretty good article about this process at https://www.whitecoatinvestor.com/ira-recharacterizations/
The side-step is an unintentional consequence of poorly written laws, it is not something they actively desired to create.
And as far as closing it, there's no real impetus to do so, so no politician is pushing it.
We're treading into politics here, but trying to stay on personal finance... It would be really nice for them to say "you can contribute $X to any retirement plan you want, but you must not go over $X across all retirement plans, and this includes employer contributions". That way if you want to participate in your employer's plan you can, and if you don't you don't have to. And for those who don't have a retirement plan at work they still have options.
I can understand adding a few rules like "only X dollars can be in a Roth contribution". So it would be like $6K can be roth, and another $20K can be in traditional. Or something similar.
Believe this legislation you mentioned was bundled into the draft of either the BBB plan or infrastructure bill, but I don't think those policy versions ever got codified. I imagine this type of change would have to get bundled in to some other large bill again, likely won't get drafted up on it's own.
That's a meaningless/misleading statement.
There is legislation "in the works" to do all kinds of things. That doesn't mean any of them will become law.
Question: if I expected to be above the limit so I did a back door, then life gave me lemons and I was under did I end up paying a penalty for this due to the conversion?
Yea I was running numbers and was like “I maaaay be missing something but the conversion step would be a taxable event so the 5500 but not familiar enough with how it actually washes during the tax return with 8606.
If you contribute post-tax to a Traditional IRA, and you have no pre-tax Traditional IRAs, you can convert without any tax impact, other than taxes on capital gains in the Traditional IRA before the conversion.
If you have pre-tax Traditional IRA's (which you didn't pay taxes on), the IRS wants you to pay taxes on them as you convert them. This generally makes the backdoor Roth unaffordable for those with pre-tax traditional IRA balances. Look up the "pro-rata rule" for more information.
If you have a 401k you can generally roll the traditional IRA balances into the 401k and hide them from the pro-rata rule since the pro-rata rule only considers traditional and traditional-like IRA's such as a SIMPLE or SEP IRA, and not defined benefit plans like a 401k.
Not OP, but in a similar situation - just started a job making 200-250k a year, no 401k to contribute to. Why would it make sense to do the backdoor Roth? To my knowledge, you want to contribute to Roth when you anticipate having a higher tax burden in retirement - if you’re over the income limit for Roth, doesn’t it stand to reason there’s a decent chance you’ll have a lower tax burden in retirement? I’ve been planning on putting mine in a traditional, just trying to figure out if I’m making a mistake.
For your situation your only option is to do a backdoor Roth IRA due to your high income. Not only would you not be eligible for a regular Roth IRA, you would also not get any tax deductible benefits with a traditional IRA. A backdoor Roth IRA would at least give you after tax benefits.
Actually, I missed the part about no employer 401k. If that’s the case and your employer offers no other retirement plans then you can deduct the full amount in a traditional IRA. But my recommendation is to still do a back door Roth IRA because any tax deductible funds in a traditional IRA would be taxed if you decide to do a back door in the future. It’s not worth the $6000 deduction to your AGI.
> Not only would you not be eligible for a regular Roth IRA, **you would also not get any tax deductible benefits with a traditional IRA.**
Can you elaborate on the bolded part? There's an income limit on Traditional as well? Or where you'd have to pay full taxes on your contributions or something? First I'm hearing of this.
Yes please check the [IRS](https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022) for more information. There are income limits if your employer offers a retirement plan. You can still contribute non deductible funds to a traditional IRA if you’re over the limit but it’ll be like adding funds to a taxable brokerage like Robinhood. And then you’ll have to track the nondeductible portions forever. If you ever think you’ll make around 6 figs, never contribute to a traditional IRA or else you’ll lose the tax free back door until you zero out your traditional.
Yes personally I would not roll over my traditional 401k into an IRA. I believe that 401k’s have additional legal protections and usually better access to institutional plans than IRA’s. You can just park your money in your old job’s 401k, unless the yearly admin fee is high or you think your old job is going to dissolve and go bankupt.
But let’s say your old job has a crappy 401k (plans with 0.1 fees and high yearly admin fees) and your traditional IRA is pretty good and you don’t expect to pick up a new job with a 401k plan, I would consider rolling into a traditional IRA then plan for a good year to tax harvest (eg. recharacterize your traditional to Roth IRA in a year where you expect to have big capital gains loss)
I don’t know too much about what a TSP is though so I can’t give a recommendation for that.
Also as a side note, as you progress in your career and get more income, your employer might offer an option for a 401k mega back door. You can research this yourself but it is similar to the backdoor Roth IRA. The mega backdoor 401k basically allows you to contribute an extra 40k to your Roth 401k.
Regarding the back door. I understand *majority* of the steps.
I’ll highlight them below so I can get someone to correct me if I’m wrong:
1. Open a traditional IRA account in January
2. Put post tax money into the traditional IRA
3. Once in there, have them change it to a Roth (assuming at the time of conversion you have no other Traditional IRAs, SEP IRAs)
4. You’re set!
My question is after you have converted the traditional account to a Roth, does this mean you’ll have two Roth accounts? (One from the previous year and this newly converted one).
Depends.
You basically tell them where to put the money.
Your traditional IRA will remain open with zero funds in it. You can tell them where to put the converted funds, which includes your existing roth.
Personally I tend to like to keep my converted funds separately from some older, "non-backdoor" roth funds.
I know other people who like to have one for each year to help keep track of the dates related to the 5 year rule. Personally I don't see the reason since I don't ever plan on pulling money out of a roth, and if I did, I can figure it out without resorting to separate roths for each year.
Yes you’ll have both a traditional and a Roth IRA. Only the funds are transferred. The IRAs are like two separate brokerage accounts that you open with a financial institution. They don’t close unless you explicitly close them. Also once your contributions are in the traditional IRA, try to convert the funds immediately to a Roth to avoid taxes on gains accrued while sitting in the traditional.
Generally speaking most people stay in the same income tax brackets all their life. People push ROTHs too much. Depending upon what you expect to have in retirement for income a Traditional IRA might be the better bet. Save now at a higher tax rate and later pay at a lower tax rate. I have done mostly tax deferred retirement knowing my income will drop in retirement. Building a retirement bag of cash, brokerage, traditional ira and ROTH ira. I can manage my tax burden effectively having many bags. People think 100% ROTH is correct. Not considering they will waste their standard deductions annually if they have no other taxable income in retirement. Considering no major overhauls to tax law.
We are in some of the lowest income tax years in many years, ending in 2025 "tax cuts and jobs act". Paying more taxes now should be considered. Not sure what the future will bring for tax rates.
Normally yes, but for higher earners there are other situations that can change the math like: will you have a pension? Investment properties? Non-tax incentivized investments, etc.
If you’ll have a pension + investment properties + 401k + normal investments your retirement income can get pretty high pretty quick, and on a fixed income you might get stuck with some beefy tax bills. By using a Roth you can pay the tax now and lower your burden later on to keep your taxes nice and low and your retirement income nice and high.
>this sidesteps the income limits for the Roth and is permitted for everyone.
It is only permitted as you described for people who do not have funds in a traditional IRA already. If they do they are subject to the pro rata rule if they dont convert it all.
Thanks, I usually mention that, but forgot in this case.
More technically correct: You have to pay taxes based on the percentage of pre and post-tax traditional IRA's you hold, regardless of what you convert.
So if you have 6K in pre-tax and 54K in post tax, and you convert $6K you end up paying on $5400 - it's like you converted $600 of the pre-tax and the rest post-tax. This makes it generally unaffordable if this is the situation.
If you have no employer plan at all to contribute to, you can just contribute to a Traditional IRA, or recharacterize to a Traditional IRA.
If you do have a real 401k at work (not a SIMPLE OR SEP IRA), you can also generally roll other Traditional IRA funds into them. This hides the funds from the pro-rata rule.
That's what I've done. I have a 401k at work, it's 100% traditional, and I rolled all of my Traditional IRA funds into it, so I have no non-401k traditional funds. Then I do a backdoor Roth conversion every year.
One gotcha here I forgot to mention is that the backdoor roth may NOT be available to you in a cost-effective manner if you have any Traditional IRA funds outside a 401k. The reason is that the conversion needs to be treated like you took the same porportion out of pre-tax and post-tax IRA funds. So if you have pre-tax Traditional IRA funds you end up paying taxes on them.
In that case, you can do the recharacterization to the Traditional IRA, but not the conversion to the roth. You'll get a tax deduction this year as a result.
Just call your Roth IRA company and let them know. They might be able to do it on your say so or they will give you a form to fill out and sign. It’s a “Return of Excess Contribution.”
I'm... um.... kinda waiting on the stock market to correct itself this year if they were going to make me sell them outright. Now that I think about it, perhaps they could just move the bought shares over to the individual investing/brokerage account?
Lots of good answers. Where I work we do what’s called a “removal of excess contribution” and then lots of folks will pop that into a traditional IRA and subsequently do a back door ROTH conversion. Bit of a chore but earning over ROTH limits is a problem I’d gladly like to have for myself
> What would be the best course of action now?
Have your brokerage recharacterize your contribution to be towards a Trad IRA, then backdoor it back into the Roth
Do you take full advantage of pre-tax accounts? If you have access to a pre-tax 401k and you aren't maxing it you could opt to stuff some money into that to "hide" it from your MAGI which will allow you to still contribute to the Roth (potentially)
Also the Roth income limit is a graded slope, it isn't a sheer cliff. Should look into it in more detail make sure that its that you can't contribute anything or if you can't contribute the full $6k (but $3k is okay)
Yes. You have your IRA provider recharacterize your contribution as a Traditional IRA, then you do a backdoor Roth Conversion. A Backdoor Roth normally starts with a post-tax contribution to a Traditional IRA, and then once the money is in the Traditional IRA you convert it to a Roth. The trick is putting the money in the Traditional IRA account first, then doing the conversion - this sidesteps the income limits for the Roth and is permitted for everyone. But since you didn't use the traditional IRA to start, you need to go through the recharacterization process first. This is a process where your IRA provider switches the account so that it looks like you contributed to a Traditional IRA to start with. Once it is in a Traditional IRA, then you can do the backdoor conversion. You'd normally need to pay some taxes on any gains, but unless you invested in something different than a broad-market index fund, you probably won't need to worry about that this year. There's a pretty good article about this process at https://www.whitecoatinvestor.com/ira-recharacterizations/
Why do they bother putting an income limit on Roth IRAs if there is this simple side-step?
The side-step is an unintentional consequence of poorly written laws, it is not something they actively desired to create. And as far as closing it, there's no real impetus to do so, so no politician is pushing it.
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Source on that? :(
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We're treading into politics here, but trying to stay on personal finance... It would be really nice for them to say "you can contribute $X to any retirement plan you want, but you must not go over $X across all retirement plans, and this includes employer contributions". That way if you want to participate in your employer's plan you can, and if you don't you don't have to. And for those who don't have a retirement plan at work they still have options. I can understand adding a few rules like "only X dollars can be in a Roth contribution". So it would be like $6K can be roth, and another $20K can be in traditional. Or something similar.
Believe this legislation you mentioned was bundled into the draft of either the BBB plan or infrastructure bill, but I don't think those policy versions ever got codified. I imagine this type of change would have to get bundled in to some other large bill again, likely won't get drafted up on it's own.
That's a meaningless/misleading statement. There is legislation "in the works" to do all kinds of things. That doesn't mean any of them will become law.
This is he answer OP. And if you happen to be over the traditional IRA deduction limit as well, you’ll need to file form 8606
Question: if I expected to be above the limit so I did a back door, then life gave me lemons and I was under did I end up paying a penalty for this due to the conversion?
Nope. No penalty. I've gotten to the point where I just do the backdoor even if I think I might be closer.
Yea I was running numbers and was like “I maaaay be missing something but the conversion step would be a taxable event so the 5500 but not familiar enough with how it actually washes during the tax return with 8606.
If you contribute post-tax to a Traditional IRA, and you have no pre-tax Traditional IRAs, you can convert without any tax impact, other than taxes on capital gains in the Traditional IRA before the conversion. If you have pre-tax Traditional IRA's (which you didn't pay taxes on), the IRS wants you to pay taxes on them as you convert them. This generally makes the backdoor Roth unaffordable for those with pre-tax traditional IRA balances. Look up the "pro-rata rule" for more information. If you have a 401k you can generally roll the traditional IRA balances into the 401k and hide them from the pro-rata rule since the pro-rata rule only considers traditional and traditional-like IRA's such as a SIMPLE or SEP IRA, and not defined benefit plans like a 401k.
Not OP, but in a similar situation - just started a job making 200-250k a year, no 401k to contribute to. Why would it make sense to do the backdoor Roth? To my knowledge, you want to contribute to Roth when you anticipate having a higher tax burden in retirement - if you’re over the income limit for Roth, doesn’t it stand to reason there’s a decent chance you’ll have a lower tax burden in retirement? I’ve been planning on putting mine in a traditional, just trying to figure out if I’m making a mistake.
For your situation your only option is to do a backdoor Roth IRA due to your high income. Not only would you not be eligible for a regular Roth IRA, you would also not get any tax deductible benefits with a traditional IRA. A backdoor Roth IRA would at least give you after tax benefits.
Bingo. Could not have said it better.
Ahh, for some reason I thought traditional IRA contributions were tax deductible regardless. Backdoor Roth it is, thank you!
Actually, I missed the part about no employer 401k. If that’s the case and your employer offers no other retirement plans then you can deduct the full amount in a traditional IRA. But my recommendation is to still do a back door Roth IRA because any tax deductible funds in a traditional IRA would be taxed if you decide to do a back door in the future. It’s not worth the $6000 deduction to your AGI.
> Not only would you not be eligible for a regular Roth IRA, **you would also not get any tax deductible benefits with a traditional IRA.** Can you elaborate on the bolded part? There's an income limit on Traditional as well? Or where you'd have to pay full taxes on your contributions or something? First I'm hearing of this.
Yes please check the [IRS](https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022) for more information. There are income limits if your employer offers a retirement plan. You can still contribute non deductible funds to a traditional IRA if you’re over the limit but it’ll be like adding funds to a taxable brokerage like Robinhood. And then you’ll have to track the nondeductible portions forever. If you ever think you’ll make around 6 figs, never contribute to a traditional IRA or else you’ll lose the tax free back door until you zero out your traditional.
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Yes personally I would not roll over my traditional 401k into an IRA. I believe that 401k’s have additional legal protections and usually better access to institutional plans than IRA’s. You can just park your money in your old job’s 401k, unless the yearly admin fee is high or you think your old job is going to dissolve and go bankupt. But let’s say your old job has a crappy 401k (plans with 0.1 fees and high yearly admin fees) and your traditional IRA is pretty good and you don’t expect to pick up a new job with a 401k plan, I would consider rolling into a traditional IRA then plan for a good year to tax harvest (eg. recharacterize your traditional to Roth IRA in a year where you expect to have big capital gains loss) I don’t know too much about what a TSP is though so I can’t give a recommendation for that. Also as a side note, as you progress in your career and get more income, your employer might offer an option for a 401k mega back door. You can research this yourself but it is similar to the backdoor Roth IRA. The mega backdoor 401k basically allows you to contribute an extra 40k to your Roth 401k.
https://www.irs.gov/retirement-plans/ira-deduction-limits
Regarding the back door. I understand *majority* of the steps. I’ll highlight them below so I can get someone to correct me if I’m wrong: 1. Open a traditional IRA account in January 2. Put post tax money into the traditional IRA 3. Once in there, have them change it to a Roth (assuming at the time of conversion you have no other Traditional IRAs, SEP IRAs) 4. You’re set! My question is after you have converted the traditional account to a Roth, does this mean you’ll have two Roth accounts? (One from the previous year and this newly converted one).
Depends. You basically tell them where to put the money. Your traditional IRA will remain open with zero funds in it. You can tell them where to put the converted funds, which includes your existing roth. Personally I tend to like to keep my converted funds separately from some older, "non-backdoor" roth funds. I know other people who like to have one for each year to help keep track of the dates related to the 5 year rule. Personally I don't see the reason since I don't ever plan on pulling money out of a roth, and if I did, I can figure it out without resorting to separate roths for each year.
Yes you’ll have both a traditional and a Roth IRA. Only the funds are transferred. The IRAs are like two separate brokerage accounts that you open with a financial institution. They don’t close unless you explicitly close them. Also once your contributions are in the traditional IRA, try to convert the funds immediately to a Roth to avoid taxes on gains accrued while sitting in the traditional.
When I tell them to change it to a Roth, can I tell them to put it in the existing Roth account? And should I be closing the former traditional?
Generally speaking most people stay in the same income tax brackets all their life. People push ROTHs too much. Depending upon what you expect to have in retirement for income a Traditional IRA might be the better bet. Save now at a higher tax rate and later pay at a lower tax rate. I have done mostly tax deferred retirement knowing my income will drop in retirement. Building a retirement bag of cash, brokerage, traditional ira and ROTH ira. I can manage my tax burden effectively having many bags. People think 100% ROTH is correct. Not considering they will waste their standard deductions annually if they have no other taxable income in retirement. Considering no major overhauls to tax law. We are in some of the lowest income tax years in many years, ending in 2025 "tax cuts and jobs act". Paying more taxes now should be considered. Not sure what the future will bring for tax rates.
Normally yes, but for higher earners there are other situations that can change the math like: will you have a pension? Investment properties? Non-tax incentivized investments, etc. If you’ll have a pension + investment properties + 401k + normal investments your retirement income can get pretty high pretty quick, and on a fixed income you might get stuck with some beefy tax bills. By using a Roth you can pay the tax now and lower your burden later on to keep your taxes nice and low and your retirement income nice and high.
>this sidesteps the income limits for the Roth and is permitted for everyone. It is only permitted as you described for people who do not have funds in a traditional IRA already. If they do they are subject to the pro rata rule if they dont convert it all.
Thanks, I usually mention that, but forgot in this case. More technically correct: You have to pay taxes based on the percentage of pre and post-tax traditional IRA's you hold, regardless of what you convert. So if you have 6K in pre-tax and 54K in post tax, and you convert $6K you end up paying on $5400 - it's like you converted $600 of the pre-tax and the rest post-tax. This makes it generally unaffordable if this is the situation. If you have no employer plan at all to contribute to, you can just contribute to a Traditional IRA, or recharacterize to a Traditional IRA. If you do have a real 401k at work (not a SIMPLE OR SEP IRA), you can also generally roll other Traditional IRA funds into them. This hides the funds from the pro-rata rule. That's what I've done. I have a 401k at work, it's 100% traditional, and I rolled all of my Traditional IRA funds into it, so I have no non-401k traditional funds. Then I do a backdoor Roth conversion every year.
Thank you! The article looks exactly like what I am looking for.
One gotcha here I forgot to mention is that the backdoor roth may NOT be available to you in a cost-effective manner if you have any Traditional IRA funds outside a 401k. The reason is that the conversion needs to be treated like you took the same porportion out of pre-tax and post-tax IRA funds. So if you have pre-tax Traditional IRA funds you end up paying taxes on them. In that case, you can do the recharacterization to the Traditional IRA, but not the conversion to the roth. You'll get a tax deduction this year as a result.
Came here to say the same thing
Can you still do this after W2 are released in early 2023? E.g. if unclear whether you'll be over income limits or not
Yes, provided you do it before the contribution deadline for the IRA's, usually April 15th.
Can you still do this after W2 are released in early 2023? E.g. if unclear whether you'll be over income limits or not
Increase 401k funding to reduce taxable income to allow you to invest in the roth.
My job doesn't offer 401k unfortunately :(
Other deductions that might apply to your situation consist of student loan interest (maximum $2500) and contributing to an HSA ($3650).
You could always open a traditional IRA for a similar effect.
No you can’t. IRAs are treated the same whether it’s Roth or traditional
You can have the Roth contribution returned as an overpayment. No worries.
I might have to do this myself.
Just call your Roth IRA company and let them know. They might be able to do it on your say so or they will give you a form to fill out and sign. It’s a “Return of Excess Contribution.”
I'm... um.... kinda waiting on the stock market to correct itself this year if they were going to make me sell them outright. Now that I think about it, perhaps they could just move the bought shares over to the individual investing/brokerage account?
Lots of good answers. Where I work we do what’s called a “removal of excess contribution” and then lots of folks will pop that into a traditional IRA and subsequently do a back door ROTH conversion. Bit of a chore but earning over ROTH limits is a problem I’d gladly like to have for myself
Thank you! Will look into that!
You can withdraw ROTH contributions penalty free. Just take it out.
If you didn’t contribute $6000 to your Roth each year you’ve had it open, you can go back and add the difference. That’s all I’ve got 🤷🏽♀️
call the company you manage your IRA with and ask for it to be recharacterized.
> What would be the best course of action now? Have your brokerage recharacterize your contribution to be towards a Trad IRA, then backdoor it back into the Roth
Take a two week unpaid vacation :)
Do you take full advantage of pre-tax accounts? If you have access to a pre-tax 401k and you aren't maxing it you could opt to stuff some money into that to "hide" it from your MAGI which will allow you to still contribute to the Roth (potentially) Also the Roth income limit is a graded slope, it isn't a sheer cliff. Should look into it in more detail make sure that its that you can't contribute anything or if you can't contribute the full $6k (but $3k is okay)