The Backdoor Roth for Physicians
Excerpt from Q1 2019 Best Life client newsletter
Q Devon, can you give me the play-by-play on contributing to a Roth IRA as ahigh-income earner? I’ve heard about the “backdoor” contribution and would like to know more…
A Sure, but be sure to do your homework if you attempt this on your own! Let’s break this down into three parts:
- What is the backdoor Roth IRA contribution?
- Why would you’d use it?; and
- How does it work?
The “backdoor” is a strategy high-income earners use to make Roth IRA contributions even though their income is greater than the income phase-out set by the IRS.
If you’re married filing jointly and your modified adjusted gross income (MAGI) is more than $193k ($122k solo), you cannot directly contribute to a Roth IRA due to income phase-outs. The backdoor is an indirect contribution and would be your only option in this case. There’s a good chance you’ve heard conflicting information on this. Especially since it only became an option in 2010 after a tax-law sunset pertaining to income phase-outs and Roth conversions.
The following is a generalized breakdown of how the process works and not a blanket recommendation for all high income earners. Some contributions via the backdoor may not be suitable so be sure to speak with your tax professional before attempting this strategy.
- Make sure you don’t have any pre-tax IRA accounts as it may have tax implications for you (see the pro-rata rule).
- Open a Traditional IRA and a Roth IRA
- Make a non-deductible contribution to your Traditional IRA from a checking/savings account (be sure it does not get invested at the Traditional IRA)
- Convert the balance of the Traditional IRA to your Roth IRA
- Invest new Roth IRA dollars
- If you complete this strategy, make sure to consult with a CPA. Generally, they will have you fill out a form titled 8606 so the IRS knows this is a non-taxable event
Send me a question and I’ll gladly address it in one of my next newsletters or we can chat about it offline!
This information is a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances. Investors’ anticipated tax bracket in retirement will determine whether or not a Roth account versus a traditional retirement account will provide more money in retirement. Generally, investors who are in a higher tax bracket at retirement relative to their current tax bracket while making contributions to a Roth account benefit more than an investor who is in a lower tax bracket at retirement. For a Roth IRA, earnings withdrawn prior to reaching age 59½ and/or not meeting the five-year holding period may be subject to a 10 percent penalty in addition to income tax. After-tax contribution amounts are generally returned income tax free; however, for Roth conversions, if converted amounts are not held for the five-year period, distributions may be subject to a 10 percent penalty 2416923/DOFU 2-2019