High wage earners can consider a “backdoor” Roth IRA contribution

backdoorHigh wage earning clients often have a modified adjusted gross income that is too high to enable him or her to deduct a traditional IRA contribution or contribute directly to a Roth IRA. This is a very interesting article on how to roll over IRAs which consist of taxable and non-taxable amounts to a Roth IRA without having to prorate the taxable portion of the IRA and pay tax at the time of the rollover.  It would also allow for these clients to then make their future non-deductible contributions to an IRA in essence end up in a Roth IRA.  There are a few IFs:


a)      the taxpayer has a 401(k) plan through his employer (or his own business if self-employed), and

b)      the 401(k) plan allows for rollovers into the 401(k) plan of employee IRAs (and if not, then perhaps the plan can be amended, especially for clients that own their own business).


c)       the taxpayer would rollover the taxable portion only of ALL his traditional & non-deductible IRAs into his employer’s 401(k) plan (cannot rollover non-taxable portions into the 401(k) plan).

d)      the taxpayer would then be left with only non-taxable amounts in their traditional and non-traditional IRA(s).

e)      the taxpayer would convert these remaining IRAs into Roth IRAs – no tax impact since no taxable amounts involved (and income threshold no longer applies to limit conversions to Roth IRAs)


f)       future contributions to non-deductible IRAs could then be soon thereafter converted to Roth IRA (with no, or very little, tax impact)

This is something to consider for clients who have some basis in their IRAs.  It will not apply if the IRA consists solely of tax deductible contributions and will mostly apply to clients that have made non-deductible contributions to their IRAs.  This can also apply to clients that might have non-taxable amounts sitting in 401(k) plans, but there would be a few more steps involved.

Note that not only is there income tax considerations, but retirement planning and estate planning issues come into play as well for reasons why this may be a good idea.  Check with your ShindelRock professional to see if this “backdoor” Roth IRA contribution play might work for you!