IRS Finally Approves Backdoor Roth IRA ConversionsSubmitted by Karstens Investments on August 14th, 2018
By Steve L. Olafson, CFP®
Last December, the IRS officially approved the backdoor Roth conversion and has finally put to bed the long running debate on whether it was legal or not. Some professionals thought the IRS could challenge the process of a backdoor Roth conversion since it was not directly spelled out as being legal, however we maintained it was a legal process under the guidance of tax professionals including Ed Slott, who is recognized as one of the nation’s leading retirement tax experts.
What exactly is a backdoor Roth conversion?
Backdoor Roth conversions came about because of income limits for making a contribution to a Roth IRA. Since there are no income limits on Roth conversions or traditional IRA contributions, the strategy is for a high wage earner to make a non-deductible contribution to a traditional IRA and then convert those funds to a Roth IRA. Thus the money goes into the Roth IRA by way of a conversion, rather than a contribution which would be subject to Roth IRA income limits.
Remember that not everyone qualifies for a backdoor Roth conversion. To be eligible to make a traditional IRA contribution, you cannot be over age 70.5 and need to have earned income (except for non-working spouses who file jointly with a spouse who has earned income.) Furthermore, keep in mind that pro-rata rules apply, meaning that the Roth conversion might be taxable if you have existing traditional, SEP or SIMPLE IRA assets.