TSP

The back door strategy can be used by a high earning taxpayer who is unable to contribute to a Roth IRA because his/her income is too high. Image: FabrikaSimf/Shutterstock.com

“I’m a back door man, whoa!” So wrote Willie Dixon in 1961. Howlin’ Wolf was the first to record the blues classic, which has been covered by many artists (including the Doors) since it was created. It’s a pretty safe bet that none of the artists who recorded Back Door Man were singing about the back door Roth IRA strategy. The original Individual Retirement Arrangement was 13 years in the future when Dixon penned his immortal (at least they’re immortal to blues aficionados) words. The IRA was still seven years away when the Doors covered the song.

The back door strategy can be used by a high earning taxpayer who is unable to contribute to a Roth IRA because his/her income is too high. It is not at all out of the realm of possibility that a higher-graded federal employee might not be able to make contributions to a Roth IRA. The 2023 income restrictions that apply to Roth contributions are listed in the table that follows.

Single filing status
Full contribution allowed if income is below $138,000
Partial contribution allowed if income is between $138,000 and $153,000
No contribution allowed if income is over $153,000

Joint filing status
Full contribution allowed if income is below $218,000
Partial contribution allowed if income is between $218,000 and $228,000
No contribution allowed if income is over $228,000

The back door strategy begins with a non-deductible contribution being made to a traditional IRA. An individual who has income above the Roth phaseouts listed above, also has too much income to be able to deduct their contribution to a traditional IRA.

The next step is converting the contribution from the traditional IRA to a Roth IRA. Minimal, if any, tax would be due on the conversion, because taxes were paid on the non-deductible contribution to the traditional IRA when it was made. Some time should be allowed to elapse before making the conversion.

There is a hitch here. If you have any pre-tax money in an IRA, this conversion would be subject to the “pro-rata rule”, in which the conversion is prorated between taxable and non-taxable IRA money in all of your IRAs.

Let’s say that you had no pre-tax money in a traditional IRA and contributed $6,500 to a traditional non-deductible IRA with the intention of converting it to a Roth via the back door. You could go ahead and do the conversion and face little or no taxes.

On the other hand, let’s say that you have $6,500 of pre-tax money in an IRA and contribute $6,500 of after tax money to another IRA, planning on converting it to a Roth. The pro-rata rule would require you to compare the pre and post-tax amounts to determine how much of the conversion should be taxed. Because half the money in the IRA was pre-tax and the other half was post-tax, ½ of the conversion ($3,250) would be viewed as coming from the pre-tax money and the other half would be viewed as coming from the already taxed contribution. Therefore, you would owe tax on $3,250.

There was concern that SECURE 2.0 would eliminate the back door Roth conversion, but that did not happen. So, some people can still be back door men – whoa!

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