Finance Tip Friday #77: Earn Too Much? Use a Backdoor Roth IRA

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Contributing to a Roth IRA can be challenging for high-income earners such as nurse practitioners. As of 2023, if you file a single return and have a taxable income of $153,000 ($228,000 for joint filers), then you’re not eligible to make a direct contribution. 

However, if you’ve already opened a Roth IRA, there is still a way to make contributions despite being a high-income earner. It’s by using a little-known technique called the back door Roth IRA conversion.

Here’s how a backdoor Roth IRA conversion works:

  1. Make a non-deductible contribution to a traditional IRA. Technically, everyone is eligible to put money into a traditional IRA. Your income just determines whether or not that contribution will be deductible when you file your tax return.
  2. Convert that amount from the traditional IRA to your Roth IRA. 

In reality, you can convert any amount you want from a traditional IRA to a Roth IRA. For example, if you had $50,000 from an old 401(k) and wanted to move it into a Roth, you could by first rolling over the 401(k) into a traditional IRA and then making the conversion. However, you need to be careful because conversions count as taxable income for the year and you don’t want to create an unnecessarily excessive tax bill. Therefore, it’s better to do these conversions little by little.

Rather than deal with all of the messy tax details, I’d strongly recommend working with a good CPA. That way you’ll know the calculations have been done correctly and you’ll be in good standing with the IRS.

There is currently no income limit and no boundaries and how much money from a traditional IRA can be converted. However, that wasn’t always the case. Before 2010, the IRS had an income limit on who could make conversions.

Therefore, there is always a fear among investors that someone may someday shut the proverbial “backdoor” on Roth IRA conversions. For that reason, it would be wise to take advantage of them while you can.

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