What Is a Back Door Roth IRA?

 

Taxpayers with higher incomes don’t qualify to contribute to a Roth IRA directly. If you’re one of these people, you can still use a Roth IRA account by using what’s known as a back door Roth IRA. 

You can use a back door Roth IRA by completing these steps:

  1. Make a nondeductible contribution to a traditional IRA. This IRA has no income limits preventing you from contributing to it.
  2. Then, immediately convert the traditional IRA contribution to a Roth IRA.

Since a conversion doesn’t count as a contribution, your income doesn’t limit it. And, since the IRS already taxed the nondeductible contribution to the traditional IRA, the conversion isn’t taxable.

However, there might be taxes on your earnings if step one and step two don’t happen all at once.  If you make a nondeductible contribution to a traditional IRA, then wait days, weeks, or months before converting to a Roth IRA, you might have accumulated earnings the IRS can tax. 

Things to Remember About Back Door Roth IRA Conversions

When you’re reporting a back door IRA, keep these things in mind if you’re using H&R Block’s online program or software: 

  • This isn’t a rollover or a recharacterization — it’s a conversion. So, answer the rollover and recharacterization questions correctly.
  • When you get to the section on IRA contributions, you must enter your conversion as a contribution to a traditional IRA, not a Roth IRA.
  • At some point, you’ll be asked for the value of your traditional IRAs. If you’ve converted all your traditional IRAs to Roth IRAs, the value is zero at the end of the current year.
  • You’ll also be asked for the basis of your traditional IRAs at the end of the previous year. If you converted all your IRAs before the end of last year, your basis is zero.

Back door IRAs can be complicated, so you need to answer all the questions correctly. Otherwise, it’ll result in a taxable conversion. If you answer everything correctly, you should have no problem entering a tax-free conversion. You’ll see the converted amount on Form 1040, Line 4a, and zero on Line 4b. 

Although we can’t help you get a back door Roth IRA, we can help you report it. Make an appointment with an H&R Block representative if you have any trouble. 

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