Backdoor Roth IRA

Backdoor Roth IRA

November 17, 2020

Do you know that there is a way to contribute to a Roth IRA even if you make too much money?

What is a Roth IRA?

A Roth IRA is an Individual Retirement Account that allows you to contribute after-tax dollars into a savings or investment account.  The after-tax dollars won’t allow you to claim a tax deduction as you might on a traditional IRA but qualified withdrawals are not subjected to federal income tax (withdrawn after the Roth IRA has been opened for at least five years and age 59 1/2).  Like a traditional IRA, interest, dividends, and capital gains are sheltered from taxes inside the Roth. The extra bonus is that as long as you meet all of the criteria, you will never pay tax on any of the earnings in the Roth IRA.  This is the amazing benefit of the Roth IRA and makes it a critical and important planning tool.

What are the contributions limits?

Subject to income limits, you can contribute up to $6,500 for 2020 and up to $7,500 if you are 50 or over to Traditional and Roth IRAs.  This isn’t a huge contribution each year, but over time these annual contributions can add up and save you thousands of dollars in taxes. Please note that Roth 401ks do not have any income restrictions.

What are the income restrictions?

For someone one who is single (or head of household), you are eligible to make the full contribution to a Roth if your modified adjusted gross income (MAGI) is under $124,000 for the tax year 2020.  The limit gradually declines between $124,000--$139,000. Above $139,000, Roth contributions are not allowed.  

If you are married and file jointly (or qualified widow/er), MAGI must be under $196,000 for the tax year 2020, while the contribution limit is gradually phased out between $196,000--$206,000. Above $206,000, Roth contributions are not allowed.

You may contribute to a Roth and a traditional IRA, but you may not exceed the prescribed annual limit.   In addition to tax-free withdrawals, Roth IRAs are not subjected to required minimum distributions.

How can I contribute to a Roth IRA if I am over the maximum income allowable?

If you have a healthy six figure income, hard limits prevent you from contributing directly to a Roth. But income limits don’t exist for converting a traditional IRA into a Roth, which leaves a loophole for high-income taxpayers. Another rule is that you cannot have any other IRAs in your name (401k and corporate retirement accounts are fine).

Long story short, you may contribute to a non-deductible traditional IRA, open a Roth IRA, convert the contribution into the Roth IRA, and pay the taxes on any appreciation.

If you do not have any other IRAs (if you do have IRAs in your name, you will need to consult with a tax advisor to determine the amount you are able to convert to a Roth IRA).

This planning strategy can help save a lot of tax dollars over the years, and I hope you have found this information educational.  

Optimizing retirement strategies and tools will help you build a stronger financial future. If you have questions or if we can help you plan for retirement, please call us at 732-224-9900; email us at or visit our website at


All investing involves risk including loss of principal. No strategy assures success or protects against loss. Dollar cost averaging involves continuous investment in securities regardless of fluctuations in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.


A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 591/2 or prior to the account being opened for five years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.