![]() ![]() That now changed once Roth conversions were allowed. In addition, you may have been saving in a taxable account because you maxed out all your other pre-tax options and contributing to an IRA without getting a tax deduction didn’t seem worth it. The problem was that if you were in a really high tax bracket converting your IRA to a Roth IRA would incur immediate taxes that you didn’t want. Anyone over the MAGI threshold still couldn’t contribute directly to a Roth IRA, but now they had another opening to fund a Roth IRA. Another grand sounding law called the “ Tax Increase Prevention and Reconciliation Act of 2005”, passed in 2006, repealed the income limitation on converting IRA dollars to a Roth IRA starting in 2010. If you aren’t sure if this applies to you follow the link above for more details or consult with your advisor or tax preparer. To make things more complicated MAGI is NOT a number that appears on your tax return and needs to be calculated independently. There is also a reduced contribution limit that comes in phases starting at $125,000 for individuals and $198,000 for MFJ. For example, in 2021 the limits on direct Roth IRA contributions are Modified Adjusted Gross Incomes (MAGI) over $140,000 for individuals and $208,000 for married filing jointly (MFJ) taxpayers. What that meant was individuals, or families, earning over a certain amount were excluded from making deductible IRA contributions (remember the deductible part as that will be important later) and all Roth IRA contributions. They shared some of the same regulations with Traditional IRAs such as the amount you can contribute and income limitations on making contributions or converting Traditional IRA dollars to a ROTH IRA. This allowed for a new type of account that could grow after tax contributions tax deferred and generally distribute the proceeds tax free, provided a few rules were followed. The Roth IRA was formed as part of the “ Taxpayer Relief Act of 1997”. To answer where the Backdoor Roth came from, we need to start at the beginning. This should stand as a guide for 2021 and beyond, or at least until they change the tax code once again! ![]() We wanted to outline this technique in three parts that should help explain how it came about, the steps needed to complete it, and the follow-up work necessary to stay out of trouble with the IRS. It is not new (it has been in use since 2010). It is not mysterious, sketchy, or illegal (as we’ll show via the IRS code and reports from Congress). It is not a special type of account (it is a conversion technique). Have you ever heard the term “Backdoor Roth” before? Sounds mysterious, maybe even a little sketchy right? Every year it comes up in an article in any number of financial publications like Forbes or Morningstar and is often portrayed to be some super-secret new idea for high income savers. ![]()
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