FORM 1040 – Backdoor Roth IRA

FORM 1040 – Backdoor Roth IRA

rothThe Roth IRA is an incredible tax sheltering device that is seemingly only available to taxpayers earning under $188,000 (married) or $137,000 (single) per year.  But due to a change in the law that allows Roth conversions regardless of income level, many higher income taxpayers can now legally make annual Roth contributions using the “backdoor” approach – the Backdoor Roth IRA.

Here is how it works:

First, you must rid yourself of any taxable IRA accounts.  If you don’t have any, you can skip this step. If you do have any, then you should roll it (them) into your employer 401(k) plan (or equivalent).  Most plans allow this.

Now that you have no taxable IRA’s, open a regular IRA account at your bank or brokerage house and make a non-deductible contribution: up to $5,500 ($6,500 if 50 or older).  Then convert the non-deductible contribution to your Roth IRA account.

Since the contribution was not deducted in the first place – and that you had no other taxable IRA’s in place – the conversion is 100% tax free. And you and your spouse can do this every year and start building a significant Roth IRA asset.