The Roth IRA "Back Door" Stategy

If your income is too high, you can’t contribute directly to a Roth individual retirement account, but you can get one in a "backdoor" way.

Step 1: Open a traditional IRA (in your case, it’s nondeductible).

Step 2: Convert it to a Roth IRA. Is it worth it? “It’s a no-brainer if you have the cash to do it,” says Kevin Huston, an enrolled agent in Asheville, N.C. who has clients both young and old doing it to shore up their retirement savings. “It especially makes sense for people who are younger because they have all these years of tax-free growth,” he says.

Basically, you get an extra $5,000 (or $6,000 if you’re 50 or older) each year that grows in the Roth IRA income-tax free. That’s $10,000 (or $12,000) a year for a married couple. Repeat each year, and you can amass a nice retirement kitty. The audience for backdoor Roths is a niche, appealing to those earning too much to contribute to Roths directly but not so much that the extra tax savings doesn’t seem worth the effort. Vanguard says that “backdoor Roth” contributions represented about 2 percent of traditional IRA contributions in 2011. (Income restrictions on conversions were lifted starting Jan. 1, 2010, so anyone—regardless of income—can convert a traditional IRA to a Roth.)

Why go through the hoops of getting money into a Roth IRA? They are an amazing deal, especially for folks looking long-term and expecting higher tax rates in the future. With a Roth IRA you don’t ever have to take money out, and when you do start taking money out, it’s all income-tax-free, including the earnings. By contrast, with a traditional IRA, earnings grow tax-deferred, you have to start taking required mandatory distributions the year after you turn 70.5, and distributions count as income. A Roth can help keep your tax bite down in retirement. (Ideally you want a mix of taxable, tax-deferred and tax-free accounts to draw from in retirement.)

For an example of how one couple is using this strategy to build their nest egg and a more complete analysis, visit the link “The Serial Backdoor Roth, A Tax-Free Retirement Kitty” at

"To Convert, Or Not To Convert"....No Income Limits on Roth IRA Conversions Beginning January 1, 2010

Part of the 2006 tax reconciliation bill is about to matter to many of us come January 1, 2010. It's sort of a good-news/bad-news deal -- but more good than bad for many. As of January 1, 2010, there will be no income limits for those who want to convert a traditional IRA to a Roth IRA. That's good because in the past, households with an adjusted gross income of more than $100,000 have been barred from converting their IRAs to Roth IRAs, and married spouses filing alone have been barred regardless of their income.

As a quick refresher, Roth IRAs are retirement savings accounts where you pay the income taxes due up front (when you contribute to the account) -- then, it grows tax-free and your withdrawals are also tax-free (but you don't get the income tax deduction when you initially contribute the money).

So, for those of you whose traditional IRAs are now worth far less than they used to be worth (that's the bad news part), converting to a Roth IRA in 2010 could be a great idea: Since the account is now worth so much less, the taxes on the conversion will also be much less than they might have been, and if tax rates go up in the future, as many predict they will, you'll have already paid the taxes due on the account.

For a good analysis on the ins and outs of the new rules, check out this Wall Street Journal online article. And, as always, please contact our firm for advice tailored to your specific situation...happy reading!