Essential Guide to Backdoor Roth IRA Conversions

Rising inflation and economic concerns have heightened the need for a comprehensive approach to retirement, which is essential for security, peace of mind, and long-term quality of life. Therefore, finding the right financial advisor who has made comprehensive retirement planning their life’s work will be your #1 ally in managing your wealth before and after your retirement celebration.

Since you are now proactively tax planning for this year and next, we will focus on 2022 tax guidelines. Use this quick guide as a solid foundation to get started in making decisions that can potentially grow your wealth well into the future. It begins with understanding your individual retirement account(s).

In this guide we will cover:

What is a Traditional IRA?

You have likely already realized that it’s not enough to fund your retirement by setting aside a chunk of your paycheck each month in a savings account. Without the amplifying effect of compounding interest, it will be hard to amass enough wealth to fund a comfortable and long retirement. That’s why many people turn to retirement accounts, which afford access to the investment markets while preserving a tax-advantaged status.

IRA stands for Individual Retirement Account, a tax-advantaged account that you can, in most cases, start independently (without an employer) in order to invest in your future. IRAs come in various forms, like SEP-IRA, SIMPLE IRA, nondeductible IRA, spousal IRA, and self-directed IRA. However, in this article, we will focus on two of the most common IRAs: traditional and Roth.

You can open a traditional IRA through a broker, advisor, or (though it’s a less popular choice) bank. Typically, traditional IRAs opened with brokers and advisors enable investors to place their money in stocks and bonds. Traditional IRAs opened through banks, on the other hand, are generally composed of CDs, which historically have a lower rate of return.

Each institution will have different fees and investment options, so pay careful attention.

Tax Status

Traditional IRAs are funded with pre-tax dollars. Contributions can be tax-deductible according to the following criteria in 2022.

If you don’t have a 401(k) or another retirement plan working in your favor, you can benefit in a different way. No matter how much income you make, you can deduct the full contribution to your traditional IRA on your annual tax return. Be sure not to miss the tax filing deadline to make your contribution for the year prior.

You may still be able to deduct all or a portion of your income, even if you do have a retirement plan in place (from work). This will depend upon your income earned for that year, which has risen slightly from previous years.

Who can deduct their full contribution for the tax year 2022?

Single status/heads of household filers:

  • With modified adjusted gross income of $68,000 or lower
  • Deductions following $68,000 decrease and phase out when income reaches $78,000

Joint status filers:

  • With earned income up to $109,000
  • Deductions following $109,000 decrease and phase out when income reaches $129,000
  • If you are married and one spouse is not employed, the working spouse can make a contribution to a spousal IRA
  • $0 to $10,000 applies for married individuals filing separately

Traditional IRAs grow tax-free until the time of withdrawal when withdrawals are regarded as taxable income.

Contribution Limits

For 2022, if you are younger than 50, the max amount you can contribute to your traditional IRA is $6,000. Workers 50 plus can add an extra annual catch-up contribution of $1,000, making $7,000 the max IRA contribution.

Contributions can be made via earned income or by rolling over another retirement account. Contribution limits apply only to earned income contributions, not rollover contributions.


There are no income limits when it comes to opening a traditional IRA.

Due to the enactment of the SECURE Act in 2020, people of any age can open and maintain a traditional IRA as long as they have earned income.

What is a Roth IRA?

Like a traditional IRA, a Roth IRA can be started independently (without an employer). You can open a traditional IRA through a broker, advisor, or (though it’s a less popular choice) bank. Again, each institution will have different fees and investment options, so  pay careful attention.

Tax Status

Like traditional IRAs, Roth IRAs grow tax-free. However, unlike traditional IRAs, the money that funds a Roth IRA is taxed at the time of contribution. The account holder can later withdraw money invested and the growth of those assets from the account tax-free.

As a result, Roth IRAs are popular choices for individuals who believe that their tax bracket will be higher in retirement than in their earning years or simply want to eliminate taxes in retirement altogether.

Contribution Limits

The upper contribution limits align with those of traditional Roth IRAs, at $6,000 and $7,000. If you are eligible to make a partial contribution, you can calculate the amount here.

Who can deduct their full contribution for the tax year 2022?

Single status/heads of household filers:

  • With modified adjusted gross income of $129,000 or lower
  • Deductions following $129,000 decrease and phase out when income reaches $144,000

Joint status filers:

  • With earned income up to $204,000
  • Deductions following $204,000 decrease and phase out when income reaches $214,000
  • $0 to $10,000 applies for married individuals filing separately

Backdoor Roth

There’s actually a sneaky access point for higher earners interested in tapping the benefits of a Roth IRA. It’s called a backdoor Roth.

How a Backdoor Roth Conversion Works

There are a few ways to create a backdoor Roth…

Option 1

Contribute the amount you would like to put in a Roth IRA as a non-deductible contribution to a traditional IRA. Then, convert those funds over to a Roth IRA.

Option 2

Convert existing funds from a traditional IRA to a Roth IRA.

Option 3

Convert an entire traditional 401(k) account to a Roth 401(k) or roll over to a Roth IRA.

In each scenario, the investor can create a pre-funded Roth IRA account. However, it’s important to note that, while their income remains above the Roth IRA limit, the investor cannot directly contribute additional funds to the Roth IRA account.

Additionally, take caution as you make rollover contributions and conversions. You don’t want the funds to move from your account to your pocket at any point in the transfer process. If this happens, even if just by mistake, expect to potentially pay a hefty penalty tax on top of the tax you’ll pay on the Roth account set up.


Mega Backdoor Roth IRA Conversion

IRA Aggregation Rule And Implications For Your Backdoor Roth Conversion

Pros and Cons for the High Income Earner

Bear in mind that higher earners will not be able to avoid their tax bills by creating a Roth IRA entirely. In the year of conversion, they must pay the taxes they owe on their money to fund the backdoor Roth. For many, that can mean a very high tax bill.

Part of the Roth’s appeal to some investors is that, at any age, you can take qualified distributions (tax and penalty-free withdrawals) from a Roth IRA equal to the amount contributed. This is a unique quality of Roth IRAs, as most retirement accounts have a minimum age at which account holders can begin to withdraw their funds without penalty.

For a backdoor Roth, investors under the age of 59½ will need to wait at least five years until they can access this feature. So, make sure that you won’t need the money you use to create a backdoor Roth within the next five years.

Despite these limitations of a backdoor Roth, advantages abound.

Because investors are not subject to additional taxes once their funds are within a Roth IRA (provided they don’t break any rules), any growth occurs without tax consequences.

Put another way, suppose you create a backdoor Roth with $100,000. You’ll have to pay income tax on that sum at the time of creation. However, consider that in five years, your account balance grows to $135,000. You wouldn’t owe a cent of tax on the $35,000 you accumulated.

The government does not require Roth IRA account holders to take Required Minimum Distributions. This feature can be handy for those over the age of 72 who aren’t ready to start drawing down all of their accounts. Keeping one account funded can continue growing as much as possible.

Lastly, Roth IRAs can be valuable estate planning tools. Because the assets have been previously taxed, all Roth IRA assets pass to beneficiaries tax and penalty-free (assuming the five-year rule is met).

Managing Roth Conversion Tax Bills

The most significant barrier to a backdoor Roth is the accompanying tax bill for many. Expect to owe income tax on the entire amount converted or contributed. If you are in a higher tax bracket, this can be an especially whopping tax bill.

Make quarterly payments on your balance.

In other words, try not to wait until tax day to pay the entire bill. If you do, your wallet will hurt more, and you may incur penalties and interest on the amount you owe.

Fund your payments with cash, not your retirement savings.

It’s good to have enough money saved to cover your tax bill without dipping into your retirement savings. Any withdrawals from your retirement funds could set you back tens of thousands of dollars over the following years due to the lost magic of compounding interest. If you’re not eligible to tap those retirement funds due to your age, you could face additional penalties for early withdrawal.

Consider adding funds over time rather than all at once.

It’s possible that you could be pushed into a higher income tax bracket via the funds you funnel into a Roth IRA. If you contribute smaller amounts over a few years, you may be able to keep your income below a critical tax threshold.

Work with a professional who understands the pro-rata rule.

The pro-rata rule applies to you if you have an IRA with both deductible and nondeductible contributions. Separating the after-tax and pre-tax funds in all of your IRA accounts when executing a Roth conversion can help lower the amount on which you owe income tax. Failing to aggregate the amounts in all of your IRAs, on the other hand, can generate added penalties and fees.

How Advanced Retirement Strategies Can Help

Retirement and tax planning are not and should never be a one-time event. Instead, it’s a proactive process that requires regular adjustments, a comprehensive tax strategy, a sophisticated income plan, and much more.

The retirement planners (CERTIFIED FINANCIAL PLANNERS™) at Advanced Retirement Strategies have the expertise and qualifications to design and implement maneuvers like the backdoor Roth—maneuvers that can create opportunities for a long comfortable retirement.

Advanced Retirement Strategies financial planners specialize in helping diligent savers in Bountiful, Utah, and the surrounding areas with $250,000 or more of investment and retirement assets (not counting your primary residence) prepare for and then transition into retirement.

We provide a transparent fee structure, so you know what you pay and what services you receive for that fee. Affluent retirees and families need professional financial planning to ensure your nest egg never falls short. We can proactively nurture it as it grows.

Don’t settle when it comes to strategizing and planning your retirement. Of course, you could do it yourself (DIY), but why take the chance of missing significant opportunities? That’s what we are here for.

We would love the opportunity to assist you and your family. Get started by setting up a complimentary 15-minute call. We look forward to getting to know you and working with you for years to come.

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