Is a ‘Backdoor Roth IRA’ Right for You?

Is a ‘Backdoor Roth IRA’ Right for You?
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A popular tax strategy known as a “backdoor Roth IRA” just barely escaped the chopping block late last month. If you aren’t familiar with this type of conversion, then here are few facts about it … and why you might want to include it in your 2022 financial plan.


Roth IRAs have many advantages: The money is contributed post-tax, for example, and it grows tax-free. When you take a distribution after age 59½, you don’t pay taxes on it. You can withdraw your contributions tax- and penalty-free at any time, and you do not have to take Required Minimum Distributions (RMDs) the way you do with 401(k)s and Traditional IRAs. This makes a Roth IRA a great way to leave a legacy as well as a way to bring flexibility to your post-retirement tax planning.


But Roth IRAs have a big drawback: For 2022, if you have a modified adjusted gross income (MAGI) of $144,000 or more filing singly, or $214,000 or more filing jointly, then you are prohibited from contributing to one.


[FEB. 16 MOAA WEBINAR: What’s New for the Upcoming Tax Season?]


That’s where the backdoor Roth IRA comes in. Here’s how the process works: First, put money in a traditional IRA account -- there are no income limitations on making non-deductible contributions to these accounts. Then, convert the traditional IRA to a Roth IRA. Do this as quickly as possible, because you will pay tax on any investment gains the money makes while in your traditional IRA account.


That’s all there is to it. However, before you contact your IRA provider, there are some important things to keep in mind.

  • You must have earned income to contribute to any kind of IRA.
  • The back-door strategy works best when you are opening your first traditional IRA account. This is because the IRS views all your IRAs as a single account when determining taxes you owe on distributions, and in the IRS’ mind, distributions include Roth IRA conversions. So, if you already have funds in an existing traditional IRA, it’s possible your after-tax contribution could become partially taxed.
  • You still have to adhere to the IRS annual contribution limits, which apply to both Roth and traditional IRAs.
  • There are two different five-year rules applying to backdoor Roth IRAs. You’ll want to keep them in mind if you plan to access the money before the five years is up.


[RELATED: State Tax Roundup: New Year will Mean Big Tax Breaks for Thousands of Retirees]


One last caveat: Even though legislation prohibiting this practice wasn’t passed by Congress this time around, this strategy could be eliminated at any time. So it’s best to consider other retirement savings options, too – employer retirement plans like the Thrift Savings Plan (TSP) and 401(k)s have much higher contribution limits ($20,500 and $27,000 for those 50 and over)


As always, MOAA doesn’t provide personal financial advice – so it’s best to seek out a fee-only financial professional to see whether your retirement plan is on track.   


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Making sound financial decisions is not always as simple as we would like. PREMIUM and LIFE members can access MOAA's Financial Planning Guide, as well as speak with a MOAA financial expert for additional assistance.


About the Author

Lila Quintiliani, ChFC®, AFC®
Lila Quintiliani, ChFC®, AFC®

Quintiliani is MOAA's Program Director, Financial and Benefits Education/Counseling. She is a former Army Military Intelligence Officer as well as the spouse of an active-duty servicemember, and worked for over a decade at military installations as a personal financial counselor.