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Backdoor Roth

This article defines the Backdoor Roth strategy and details how to enter a Backdoor Roth in your Plan.

Nancy Gates avatar
Written by Nancy Gates
Updated over a week ago

What is a Traditional IRA?

A Traditional IRA is a retirement account type that may allow an individual to contribute pre-tax dollars, taking advantage of a tax deduction in the year they contribute to the plan.

  • There are limits on annual contributions to a Traditional IRA or a Roth IRA

  • There are no income limits on contributions to a Traditional IRA

  • You may not qualify for a tax deduction on your contributions to a Traditional IRA, or you may not qualify for a full income tax deduction, if your income exceeds certain thresholds

  • Traditional IRA withdrawals are taxed at the individual's ordinary income tax rate

  • Traditional IRAs have a 10% penalty for withdrawals prior to age 59.5

  • Traditional IRAs require Required Minimum Distributions at age 72


What is a Roth IRA?

A Roth IRA is an account type that that may allow an individual to contribute after-tax dollars and avoid income tax on any future qualified withdrawals. So, Roth accounts are considered tax-exempt or tax-free.

  • There are limits on annual contributions to a Roth IRA or a Traditional IRA

  • There are income limits on contributions to a Roth IRA. If your income exceeds certain thresholds, you may not qualify for a direct contribution, or you may not qualify for a full direct contribution.


What is a Backdoor Roth?

A Backdoor Roth is not an account type, it is a strategy. Anyone can convert traditional IRAs to Roth IRAs, regardless of annual income. So, the Backdoor Roth strategy may allow individuals who do not qualify for a direct contribution to a Roth IRA to circumvent the income limits. A Backdoor Roth IRA is useful for high earners whose are covered by a retirement plan at work which makes them ineligible to deduct their Traditional IRA contributions in the first place.

A backdoor Roth IRA works like this:

  1. You open a new Traditional IRA and make non-deductible contributions

  2. You immediately convert the Traditional IRA into a Roth IRA

  3. Your Roth dollars grow tax-free


How do I enter a Backdoor Roth in My Plan?

The best way to account for a Backdoor Roth in your plan is to create a Roth IRA account and add contributions representing the annual amount converted from the Traditional IRA to the Roth IRA. There will be no tax modeling when you do this, the contribution will be entered after-tax, mirroring the common process of making immediate Roth conversions.

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