BackDoor IRA

Back Door - IRA Today TaxMama® hears from ET in the TaxQuips Forum, who recently learned about Back Door Roth IRA contributions and wanted to know how they work.

Dear ET,

You’re reading articles about contributing to IRAs and then rolling things into a Roth.

What the articles don’t seem to tell you is – you don’t need to first open a regular IRA at all.

You can take the $3,000 in your old Fidelity 401(k) and roll it directly into a Roth IRA.
(You don’t need that intermediate step.) Just do it as a trustee-to-trustee transfer.
Do NOT have it hit your own bank account at all.

What are the tax implications? You will pay tax on the $3,000, but no early withdrawal penalties. You must leave the money in there for at least 5 years, to avoid any early withdrawal penalty on the entire rollover.

Your implication is that you are earning too much to qualify for Roth contributions, is that the case? If not, make some contributions directly to a Roth IRA each year.

If you DO earn too much to contribute directly to a Roth, want to make contributions to a regular IRA each year. Then you can roll them over to a Roth and pay taxes on the entire balance, including earnings. Again, same rules apply – leave it there for 5 years.

If the contributions to the IRA are non-deductible (your income may be too high since you are covered by an employer plan), then you can roll over the money to a Roth IRA each year and only pay taxes on the earnings on that regular IRA.

It’s actually quite simple. As long as you leave the money in the Roth IRA for at least 5 years, you will get all the earnings tax-free when you ultimately retire. (Or there are ways to tap into it earlier…but that’s a whole other issue.)


And remember, you can find answers to all kinds of questions about Roth IRAs and other tax and business issues, free. Where? Where else? At

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