You might be thinking about contributing to a Roth IRA. One big hurdle to making these contributions is the fact that there are income limits that make high income individuals ineligible. For 2024, the phase out range for eligibility for Roth IRA contribution is between $230,000 – $240,000 for those who are married filing jointly and between $146,000 – $161,000 for single filers.
If you are a high earner, you may be able to get around the pesky income limits by using the backdoor Roth IRA conversion strategy. To do this, you make a nondeductible traditional IRA contribution and then convert those funds to a Roth IRA. This strategy works because there are no income limits for traditional IRA contributions or Roth IRA conversions like there are for contributions made directly to a Roth IRA.
When doing a backdoor Roth IRA conversion, here are two important cautions to keep in mind:
Example 1: Jose is age 75, still working and married. His wife is age 73 and retired. Jose will earn $25,000 in 2024. Assume their joint income exceeds the Roth IRA contribution limits. Jose can contribute $8,000 (including the $1,000 catch-up amount) to his nondeductible IRA, and his wife can contribute $8,000 to her nondeductible IRA even though she has no earnings. She can qualify using John’s earnings as long as they are married and file a joint tax return. Once they each contribute to their nondeductible traditional IRAs, they can each convert those IRAs to Roth IRAs shifting a combined $16,000 to their respective Roth IRAs.
Example: Grace, age 37, is single, and her income is too high for her to contribute directly to a Roth IRA for 2024. She decides to use the backdoor Roth IRA conversion strategy. She makes a non-deductible contribution of $7,000 to a traditional IRA and then converts the funds to a Roth IRA. Grace also has a SIMPLE IRA from a previous employer. Grace’s backdoor Roth IRA conversion will be partially taxable because the pro-rata rule will apply.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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