April 26, 2024

Today’s topic for tax �p Friday is Backdoor Roth IRAs. While Roth IRAs are very popular, many
high income taxpayers are unable to contribute due to Modified Adjusted Gross Income (MAGI)
limits. The backdoor Roth IRA is a strategy that allows high income taxpayers, who are unable to
contribute to a Roth IRA due to MAGI limits, to indirectly make a Roth conversion. In 2024, the
MAGI limits are $240,000 for married filing jointly taxpayers ($161,000 for single taxpayers). If
done correctly, it can be a tax free transaction.

The steps for a Backdoor Roth IRA are as follows:

1. Taxpayer contributes money to a traditional IRA (assuming they are eligible to make a
non-deductible traditional IRA contribution).
2. Taxpayer immediately rolls over the traditional IRA contribution into a Roth IRA to
avoid earnings on the contribution.

Be careful of the pro rata rule!

To the extent you have pre-existing IRA accounts funded with pre-tax dollars, the amount of the
Rollover to a Roth IRA will be allocated proportionally between the deductible and non
deductible IRA contributions, creating taxable income. The portion of the Rollover attributable
to pre-tax contributions will be considered taxable income.

One final consideration should be the five-year rule. Since the Backdoor Roth IRA is considered a
conversion, not a contribution, you must wait five years to withdraw funds tax free. There are
some exceptions to this rule.

Your investment advisor is most likely familiar with this strategy.

For additional information, please contact your tax partner/manager.

Visit Stephano Plus