Since their introduction in 1997, Roth IRAs have been a unique way for investors to save for retirement. Rather than offering an upfront tax break like their traditional counterparts, Roth IRAs let you take withdrawals tax-free after you retire. That's a particularly appealing proposition for many people, especially if you anticipate being in a high tax bracket in retirement and want to avoid being forced to take taxable distributions from non-Roth retirement accounts.
However, Roth IRA contributions aren't available to everyone. If you make more than a certain amount of income, then you're not allowed to contribute directly to a Roth IRA. However, through a strategy called the backdoor Roth, even high-income taxpayers can get money into a Roth IRA.
What are the Roth income limits?
Your ability to contribute to a Roth IRA depends in part on your income. In the table below, find your tax filing status and then read across to find out what your income limits are for a 2022 Roth contribution.
For this filing status:
Contributions are reduced if income is above this amount
No contribution is allowed if income exceeds this amount
Single, head of household, or married filing separately IF you didn't live with your spouse during the year
Married filing jointly or qualifying widow or widower
Married filing separately IF you lived with your spouse at any point during the year
Those with incomes above the number in the rightmost column can't contribute anything at all to a Roth IRA. Those with incomes between the numbers in the two columns can make a pro rata contribution to a Roth, based on the maximum contribution of $6,000 for those under age 50 and $7,000 for those 50 or older in 2022.
The backdoor Roth fix
Even if you can't contribute to a Roth IRA, you can contribute to a traditional IRA. Moreover, there are no income limits on your ability to convert money from a traditional IRA to a Roth IRA. That gave birth to the backdoor Roth strategy, which simply involves contributing money to a traditional IRA and then converting it to a Roth soon thereafter.
In the ideal situation, one of two things happens. If you are entitled to a tax deduction on your traditional IRA contribution, then converting that amount will generate taxable income that should perfectly offset the deduction. That will put you in the same position as if you had contributed directly to a Roth.
Alternatively, if you can't deduct your traditional IRA contribution, the conversion might not generate any taxable income. If the nondeductible contribution you just made constitutes all of your traditional IRA funds, then a conversion can be tax-free. Again, if that's the case, then the net tax impact will be identical to what would have happened if you'd been able to put money directly into a Roth IRA.
Where problems arise is if you have made deductible IRA contributions in the past but can't deduct your current-year contribution. In that case, you could end up with some extra tax liability, as only a pro-rata portion of your conversion will be treated as tax-free. That might be worth it for some taxpayers, but it's not the same treatment as a direct Roth IRA contribution would have seen.
Use the Roth tax break to your advantage
There's no guarantee that lawmakers won't close the backdoor Roth in the future, so if you want to take advantage, it pays to get moving now. Doing so could be the best way to maximize your flexibility and tax savings in retirement.
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