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Psst...the Backdoor Route to a Roth IRA
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High Earners Who Can't Contribute to a Roth Have Another Way In
March 3, 2014 4:00 p.m. ET
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Going through the back door can pay off for high-income retirement savers.
We're talking about the backdoor route into popular Roth individual retirement accounts,
which offer tax-free income in later life.
The front door into Roths is shut for many
investors. Married couples earning
$191,000 or more and singles earning
$129,000 or more in 2014 are barred from
High earners can't contribute directly to popular Roth individual retirement accounts. But there's still a way in.
We explain a simple two-step strategy that works for many people. WSJ's Karen Damato explains.
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contributing directly to Roth IRAs.
But there's a simple detour that works for
many of them. They can put money into a
traditional IRAand then roll that into a
Roth IRA, getting all the benefits.
More than 40% of the Silicon Valley executives working with adviser Bijan Golkar of
FPC Investment Advisory Inc. in Petaluma, Calif., do this year after year, he says. Roth
IRAs are "a great tool" for these clients, who are likely to be in high tax brackets even in
retirement because of hefty 401(k) accounts, he says.
With a Roth IRA, contributions are made with after-tax dollars, but earnings compound
without tax and can be withdrawn tax-free in retirement. With a traditional IRA, in
contrast, qualifying savers get an upfront tax deduction but owe tax when money is
withdrawn.
Most high earners who can't contribute directly to a Roth also can't make a deductible
IRA contribution. For instance, there's no deduction if you are covered by a retirement
plan at work and have 2014 income of at least $116,000 on a joint return or $70,000 as
a single filer. So for those investors, a traditional IRA is ho-hum.
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Psst...the Backdoor Route to a Roth IRA - WSJ.com http://online.wsj.com/news/articles/SB100014240527023041045045793...
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But high earners are still allowed to contribute to a traditional IRA, and that's the first
step in the indirect route to a Roth IRA. The next step, which might occur as soon as a
few days later: Convert that traditional IRA to a Roth, which is a move available to all.
There's one big caveat: This strategy works best for people who don't already have
money in traditional IRAs. That's because in conversions, earnings and previously
untaxed contributions in traditional IRAs are taxedand that tax is figured based on all
your traditional IRAs, even ones you aren't converting.
For an investor who doesn't already hold traditional IRAs, creating one and then quickly
converting it into a Roth IRA will cost little or nothing in tax, because after a short holding
period there's likely to be little or no appreciation in the account.
But if you already have money in traditional IRAs, particularly ones for which you took a
deduction, you could face a far higher tax bill on the conversion.
"That is definitely a trap that people fall into," says Jeffrey Levine, a CPA with Ed Slott &
Co. in Rockville Centre, N.Y.
One possible workaround, he says, is to roll older traditional IRAs into your 401(k) plan,
if the plan allows. Then converting a new IRA into a Roth will cost you taxes on only the
earnings, if any, of the new account.
Ms. Damato is a news editor for The Wall Street Journal. Email her at
karen.damato@wsj.com.
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Psst...the Backdoor Route to a Roth IRA - WSJ.com http://online.wsj.com/news/articles/SB100014240527023041045045793...
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