Higher-income investors who want access to Roth IRAs may need to use the back door. IRS income limits restrict high-income investors from making Roth contributions. However, there are no income restrictions on conversions. These investors can contribute through the back door by making a nondeductible traditional IRA contribution and then converting to a Roth IRA. From a tax standpoint, this strategy works best if you don’t have other traditional IRA assets, because otherwise part of the conversion would be subject to income tax. There are two ways to get tax-free earnings. Is your modified adjusted gross income (AGI) under required contribution limit for the year?
YES:
Then you can contribute directly to a Roth IRA.
NO:
Step 1. Make a nondeductible contribution to a traditional IRA.
Step 2. Convert your traditional IRA into a Roth IRA.