Backdoor Roth IRA BasicsBack doors have a bit of a bad reputation. Don’t let that cloud your opinion of a backdoor Roth IRA contribution.
First, an aside on back doors…most of us think of them as a way to slip out of a place unnoticed. They can also be used to sneak into a place. There are, of course, plenty of legitimate uses for a back door. Imagine you are a celebrity trying to attend an event and not wanting to draw attention to yourself. The backdoor Roth IRA is your chance to be a celebrity.
The ideal candidate for a backdoor Roth IRA is someone who is looking for additional tax free growth on their investments, but who makes too much to be eligible for a normal Roth IRA contribution. For 2018 “too much” income is defined as $135k for a single person and $199k for a couple). If you’re in that boat and do not have any other traditional IRAs (also called Rollover IRAs, IRA Contributory accounts, and other things like that), you’re in luck.
You can still make a nondeductible IRA contribution. That is just as it sounds. You do not get a tax deduction for that contribution, but it will grow tax deferred until you take it out. We don’t just want tax deferral though. For you, let’s convert that nondeductible IRA into a Roth IRA. Now the growth is tax free.
Important note: There is enough nuance to this that you should consult with a CPA and/or investment advisor before you do one. For instance, in order for a backdoor Roth IRA contribution to work, you must not have any other regular/traditional IRAs. Oddly enough, having a regular/traditional 401k doesn’t get in the way. Having a Roth IRA doesn’t get in the way either.
Now, back to back doors. I suggest never oiling them so that they squeak. That way when your kids try to sneak out, you’ll hear them…at least that’s how I presume I got caught. It couldn’t have been because I was too loud or looked like I was up to something earlier in the evening.