Ask a Trainer: Should I Make Backdoor Contributions to a Roth IRA?

This post has been updated to reflect income and contribution limits for 2023.

The Roth IRA began in 1998 as a way to encourage middle-class Americans to save for retirement without reducing revenue (i.e. taxes) to the federal government in the short term. Although Roth IRAs have income limits aimed at excluding higher-income people, major loopholes still allow just about anyone to stash cash now that they can withdraw tax-free in retirement. One of those loopholes is known as the “backdoor” Roth IRA contribution. Here are four signs that a backdoor Roth might be for you:

You make too much to contribute directly to a Roth IRA

To contribute the annual maximum of $6,500 directly to a Roth IRA, your income after certain deductions has to be less than $138,000 as an individual or $218,000 as a couple. If you make more than that, you can’t contribute directly to a Roth IRA; that makes the backdoor Roth an option for you.

Keep in mind that the income limits are based on your modified adjusted gross income (MAGI), not your salary. For many people, adjusted gross income (AGI)—which can be found on your tax return—will be the same as the MAGI or at least close. If you have questions about calculating your MAGI, it’s best to talk to a tax professional.

You are already maxing out your 401(k) and Health Savings Account (HSA)

If your income exceeds the Roth IRA limits, that’s a sign that you make a good income—congrats! It also means that you’ll likely benefit the most from maximizing your pre-tax savings options such as your 401(k) and HSA if you have one before focusing on your post-tax options. Pre-tax contributions reduce your taxable income today with the hope you’ll be in a lower tax bracket in retirement.

You can contribute up to $22,500 to your 401(k) annually and up to $3,850 to an HSA as an individual (or $7,750 for families) in 2023. To contribute to an HSA, you must have a high deductible health plan (HDHP). 

You don’t already have money in a pre-tax individual retirement account (IRA)

Having pre-tax money in a Traditional IRA, SEP IRA, or SIMPLE IRA is a big hurdle to making backdoor Roth contributions because of the IRS’s “pro-rata rule.” When you make contributions to a traditional IRA without taking a tax deduction for them, you are making after-tax contributions to a pre-tax account. When you have a mix of pre-tax and post-tax money across your IRAs (even if they are in different accounts or with different institutions), the money you convert is taxed in proportion to your overall pre-tax/post-tax split.  

Here’s the TLDR version: if you have an IRA with pre-tax dollars in it when you make backdoor Roth contributions, you could end up with an unwelcome tax bill and a bit of an administrative headache.

You have extra cash that you don’t need for other goals

If you meet the criteria above and have an additional $6,500 sitting around that you don’t need for anything else, go for it! Remember that we are all dealing with limited resources, so make sure that you’ve assessed your short-term goals and are on track with those.

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