What To Do When Markets Fall
Income limits block Roth contributions, but a backdoor Roth offers a legal workaround using a traditional IRA. It is not a special account. It is a two-step process.
First, we make an after-tax contribution to a Traditional IRA. Because of your income, that contribution is nondeductible on your Tax Return.
Second, we convert that money to a Roth IRA. There is no income limit on Roth conversions.
Why people use it
Once money is in a Roth IRA, it can grow tax free. Money originally contributed as on-deductible IRA contribution can be withdrawn tax free.
As can the investment gains made, once the owner has had a Roth IRA anywhere for 5 years. Roth IRAs also have no required minimum distributions during your lifetime, which adds flexibility in retirement and estate planning.
For high earners, this can be one of the few remaining ways to consistently build tax free retirement assets.
What can trip people up
The IRS looks at all your Traditional IRAs as one combined pool. If you already have pretax IRA money from rollovers, SEP IRAs, or SIMPLE IRAs, part of the conversion may be taxable under the pro rata rule. You cannot choose to convert only the after-tax dollars.
Timing also matters. Any growth before conversion may be taxable. Reporting matters too. IRS Form 8606 must be filed correctly to track after tax contributions and avoid double taxation.
Bottom line
A Backdoor Roth can be a powerful long term planning tool. But the tax rules are unforgiving. When coordinated carefully with your CPA and advisors like us, it can create future tax-free income. When done incorrectly, it can lead to unexpected taxes and penalties. This is a strategy where precision matters.
This information is for educational purposes only and is not intended as tax or legal advice. Tax rules are complex and subject to change. Please consult your tax professional regarding your specific situation.
