By Dr. Tyler Scott, WCI ColumnistAs the daylight fades ever earlier and the hushed softness of newly driven snow quiets the world around me, I, in only the second winter of my newly blossomed financial planning career, am already starting to form a Pavlovian association between this frosty season and the ding of my inbox indicating yet another question about Backdoor Roth IRAs. While the excitements and befuddlements surrounding this favorite tax loophole among high earners are decidedly evergreen, there seems to be a disproportionate amount of energy surrounding the Backdoor Roth during these crisp and festivous months.
Some combination of pragmatic end-of-year tax planning, the ubiquity of human procrastination manifesting at the end of the calendar, and the eagerness of the financial optimizers in action at the beginning of the calendar all conspire to make wintertime ripe for questions regarding the Backdoor Roth IRA and IRA contributions in general.
Or maybe it’s just because the need to utilize the Backdoor Roth IRA process is determined by one’s Modified Adjusted Gross Income, or MAGI, making the Backdoor Roth the modern and ironic Gift of The Magi for those financially fortunate and literate enough to receive it.
Regardless of the reason, given this elevated seasonal interest, I’d like to offer some considerations regarding direct (aka “Frontdoor”) and indirect (aka “Backdoor”) Roth IRA contributions, particularly in the context of when your life may be changing in the year ahead.
What Is a Backdoor Roth IRA?
If you don’t know about the Backdoor Roth IRA, stop reading this article and first read the foundational posts on the subject below.
- Understanding the Roth IRA and the Account Benefits
- How to Do a Backdoor Roth IRA
- 17 Backdoor Roth IRA Mistakes to Avoid
In short, a Backdoor Roth IRA is a series of steps taken to use a loophole in the tax code that would otherwise prevent “high earners” from contributing to a Roth IRA. This loophole allows for anyone with earned income (or married to anyone with earned income) to make a non-tax deductible contribution to a traditional IRA and shortly thereafter convert those funds to the highly tax-advantaged Roth IRA.
Who Needs to Use the Backdoor Roth IRA Loophole?
For 2024, the MAGI limits for making the full $7,000 direct, Frontdoor Roth IRA contributions are determined by your tax filing status as follows:
- Single: $146,000
- Head of Household: $146,000
- Married Filing Separately (and not living with spouse during the year): $146,000
- Married Filing Jointly: $230,000
- Qualifying Widow(er): $230,000
- Married Filing Separately (and living with spouse during the year): $0
Anyone with a MAGI above these limits who wants to make the maximum contribution to their Roth IRA for the 2024 tax year must make use of the Backdoor loophole. Most readers of this blog are above those limits and, thus, are not necessarily the intended audience of this column.
Who is the intended audience for this column?
I am writing this article as a word of warning to those who think they will have a MAGI under the ever-changing annual limits in the coming tax year and, therefore, believe they do not need to venture into the mysterious and foreboding realm of the Backdoor Roth IRA. Depending on life circumstances, those people could end up being wrong, costing them time and money.
The following are demographics of people I have encountered who, mistakenly, thought they did not need to use the Backdoor process and ended up with a mild-to-moderate case of IRS-induced tax anxiety with its known comorbidity of paperwork-induced rage and exasperated time wasting.
Those Finishing Training
This is the most common group to find themselves stubbing their toe against the direct Roth IRA stumbling block. As faithful WCI readers, many residents and fellows have gotten into the excellent habit of making a direct Roth IRA contribution in January each year.
However, this habit can prove problematic when you make that contribution in January of your final year of training, a year in which you will finally and mercifully have a few months of attending-level income later in the year. Even with a handful of “real paychecks” combined with a partial year of resident income, it is easy for a new attending to exceed the MAGI limits for direct Roth IRA contributions.
For example, a single resident making $60,000 a year completes their $7,000 direct Roth contribution in January and finishes training in June. Their income from six months as a resident is $30,000. They take off July to move and get settled before starting their new attending job in August which pays $360,000 annually. Five months of that income is $150,000, giving them a gross annual income of $180,000, which is above the MAGI limit of $146,000. That makes their direct Roth IRA contribution from January “ineligible.”
[AUTHOR'S NOTE: Advanced readers may start doing some math here about how they could get their MAGI under $146,000, via above-the-line deductions like 401(k)/403(b)/457(b) contributions. While this technically may be possible in rare cases, keep in mind that the year they finish residency should be a year where they were already making Roth contributions to their residency 403(b) for part of the year. Also, this is a year that they should be doing Roth conversions of any pre-tax balances in 403(b)s/401(k)s and especially any traditional, SIMPLE, or SEP-IRAs to avoid pro-rata rule issues with their future Backdoor Roth IRA, all of which will raise their MAGI.]
Those Getting Married to Another Earner
Marrying another earner during the year can also cause your direct (Frontdoor) Roth IRA contribution to be deemed ineligible by the IRS.
Let’s say our single resident still has three years left before becoming an attending. When Cupid’s arrow strikes in the hospital cafeteria and they find themselves married to an attending orthopedic surgeon later that year, they are no longer a single tax filer with $60,000 of gross income. Instead, they are a Married Filing Jointly tax filer with $760,000 of gross income, and they now have a small mess to clean up regarding their well-intended direct Roth IRA contribution from earlier in the year.
Note that tax filing status is determined by whatever is true for you on December 31 each year. If you were single all year and got married on December 30, you must file your taxes under one of the married designations.
Those Divorcing a Non-Earner
Cupid’s arrow cuts both ways, and we have all seen the statistics that tell us more than half of marriages result in divorce.
Consider a married earner with a MAGI under the Married Filing Jointly direct Roth IRA income limits but above the single income limits ($200,000 works as a good example for 2024). Our married earner has become accustomed to making a direct Roth IRA contribution for themselves and their “stay at home” spouse each January. By the end of the year, the couple is divorced, and both spouses are filing their taxes as Single or Head of Household.
The non-earner has no problem because they have a MAGI of $0, but our earner who thought they were making an eligible direct Roth IRA contribution suddenly finds themselves with a MAGI that exceeds the limit for a Single or Head of Household filer.
Those Filing Taxes as Married Filing Separately for PSLF Optimization
This can be, and has been, an entire blog post on its own so I am intentionally not going into the weeds on this one.
For our purposes, let’s agree that some people have read enough on their own about Public Service Loan Forgiveness (PSFL) and the myriad Income Driven Repayment (IDR) plans or paid a student loan expert to explain their options to them well enough to understand this complex and dynamic area of personal finance. During this educational endeavor, it was determined that it makes sense for them and their spouse to file their taxes separately even though they live together so they can make the lowest possible payments while one or both of them await forgiveness of their loans.
As outlined above, the MAGI limit for direct Roth IRA contributions for those in this situation is $0. Staying below a $0 cap is a mathematical challenge.
Consider a couple who was under the Married Filing Jointly income limits for direct Roth contributions and make their maximum allowed Roth contribution each January. In March of the following year, they meet with StudentLoanAdvice.com and learn they need to file their taxes separately for last year and for the foreseeable future. They unexpectedly and unknowingly find themselves with ineligible contributions to that Roth IRA both from two months ago and from 14 months ago (from January in year 1 and from January in year 2).
Those Who Make More Than They Expected
Happily, sometimes people just end up with more income during the year than they forecasted. This can be the result of unexpected raises, unwanted extra shifts, or unplanned bonuses for themselves or their spouse. Sometimes people end up moonlighting more than they anticipated, change to a higher-paying job/role, or have a side hustle that produces more or faster than anticipated.
Sometimes people leave their dental career to follow a physiologically mandated and philosophically motivated switch to flat fee financial planning that they think will not produce much income but goes way better than expected while also earning unplanned money writing for their favorite blog and helping that blog’s subsidiary company during busy times in the same year their spouse who works for that same company gets a promotion and a raise to produce the podcast—all of which makes their direct Roth IRA contributions from 11 months ago ineligible. Hypothetically speaking, of course.
In other words, lots of unknown stuff can happen during a year that really changes where someone’s MAGI ends up landing.
Those Losing Qualifying Widow(er) Status
Fortunately, this doesn’t come up often, but I think it’s worth mentioning. First, let’s define what a qualifying widow(er) is for tax purposes.
Recall from above that I said your tax filing status is determined by your marriage status on December 31 of each year. The one exception to that rule is when your spouse dies. In the year of your spouse’s death, you can still file your taxes Married Filing Jointly. For the next two years after that, you can file as a qualifying widow(er) assuming you don’t remarry, have at least one child you can claim as a dependent, and pay for more than half the cost of keeping up a home. After that, you file your taxes as a Single filer or Head of Household.
In that tax year when you lose qualifying widow(er) status, if your MAGI is below the qualifying widow(er) limit but above the Single/Head of Household limit, you can find yourself making an ineligible direct Roth IRA contribution.
Other Groups
I can’t think of any other groups that this column could apply to, but I bet you can. I look forward to learning from you in the comments!
More information here:
How I Failed and Then Mastered the Backdoor Roth IRA
How Do You Avoid This Problem?
Simply put, when in doubt, just use the Backdoor loophole. There is no penalty, problem, or punishment if you use the Backdoor Roth IRA loophole unnecessarily.
You’ll probably have to do it one day anyway, so just learn to do it now and you’ll quickly realize it’s not very hard. Especially with all the great online tutorials that show you exactly how to do it.
More information here:
Vanguard Backdoor Roth Tutorial
How to Do a Backdoor Roth IRA at Fidelity
What Should You Do If You Messed Up?
If you are reading this and are realizing one of these scenarios applies to you (and it's left you feeling sweaty and tachycardia): I’m sorry and you’re welcome.
Don’t stress too much; it’s not that big of a deal to fix the error. The solution is to recharacterize your Roth IRA contributions into traditional IRA contributions and then start the Backdoor Roth process from there.
There are a few pitfalls to be aware of with an IRA recharacterization:
- This is going to require calling the custodian of your IRA, being on hold, filling out paperwork, and navigating a bureaucratic process that will reduce your free time and raise your blood pressure.
- Any growth that occurs on your original (ineligible) direct Roth IRA contributions from the date of the contribution to the date of the conversion will be taxable to you at your marginal tax rate as ordinary income. This is likely to be a few hundred dollars of added tax.
- The deadline to complete a recharacterization is October 15 of the year following the ineligible contribution. For example, if you make an ineligible Roth IRA contribution in January 2024, you have until October 15, 2025, to do the recharacterization. Note that if you make an ineligible Roth IRA contribution in April 2024 for the 2023 tax year, the deadline to fix that via recharacterization is October 15, 2024. If you miss that deadline, you must remove the entire Roth IRA contribution along with any growth and pay a 6% penalty on the amount removed.
The Bottom Line
Here's the TLDR of this post.
- Beware of making your direct Roth IRA contribution early in the year. Lots of things can happen that may make that contribution ineligible in the ~15-21 months before you file your tax return.
- If there is any doubt about your income, marital status, PSLF strategy, etc., either 1) Wait until you have completed most of your tax return to make your direct Roth IRA contribution or 2) Just use the Backdoor Roth IRA process to make your contributions in the first place.
In need of help on your financial journey? Over the years, The White Coat Investor has carefully curated a recommended list of professionals who have been thoroughly vetted and trusted by thousands of readers. Explore our handpicked selections today, and get the exceptional support you deserve.
Have you ever messed up your direct Roth IRA contribution? What happened? How did you fix it? What did it cost you?
Great article! I am not a medical professional, but I am a high earner on the fringe of these limits. I have been doing the backdoor to be safe and it’s been the wise move. I ended up being over last year.
One clarification for your resident to attending example, AGI and MAGI are calculated before standard or itemized deductions, so those could not be used to lower MAGI.
I looked that up again yesterday when I decided again to do the backdoor process.
Bill, yes good catch, thank you. The standard or deduction itemized deduction reduces taxable income not AGI/MAGI (edit has been made).
I’m glad and impressed you have been using the backdoor loophole “unnecessarily” to be safe in the past and happy to hear it ended up being a wise choice last year.
Looks like with our reduced “part time” income, we may finally get our FIRST direct contribution Roth dollar. I have no Roth money. Never did a back door as we had a 401, SEP, 457, an HSA and 529 plans to stoke, and were spending the rest.
Because my part time W2 payor allowed me to access their 401K (via a letter in October), I maxed it out in the last quarter and reduced our MAGI by $30K. I used cash reserves for expenses as our paycheck dropped to $35 biweekly for three months. They dropped the eligibility out of the blue, late in the year, so no planning.
With my longstanding SEP-IRA, I have always put in 25% after expenses on my side gig. I’ve never changed it to a solo 401 as I’ve had access to a 457 to max out and didn’t need the extra capacity.
So, from your article and the others, it seems I can make a $7500 Roth contribution for my wife (who doesn’t work) and myself if our AGI is <$228K in 2023 and $230K in 2024. It locks that money in for 5 years as both of us are about 59.
I’m curious. If I did this for two or three years, and didn’t really need the money, could I someday (in two decades) leave these already taxed Roth accounts to my children?
Sure. Just make them the beneficiaries and leave it to them when you die. Or withdraw it and gift it to them.
Regarding leaving Roth IRAs to your kids – Yes, from a tax perspective Roth IRA accounts are excellent accounts to inherit from older family members. They are not as good as they used to be (RIP Stretch IRA) now that the balance as to be withdrawn 10 years after the death of the original owner but still, they are great accounts to leave to your heirs.
https://www.whitecoatinvestor.com/inherited-iras-podcast-189/
Regarding “locking that money in for 5 years” – I recommend reading the article below to get a more accurate handle on the 5 year rule for Roth contributions. First, remember that you can always withdraw your Roth IRA contributions tax and penalty free.
If you are over 59.5 and haven’t had the account open for 5 years then you can withdraw the contributions and earnings penalty free but you have to pay tax on the growth. Keep in mind that the 5 year clock starts on January 1 of the TAX YEAR that you make the contribution for. For example, if you made your first Roth contribution in March of 2024 for the 2023 tax year, your 5 year clock would start on January 1, 2023.
I noticed on another thread you were concerned about this rule with Roth contributions to employer provided accounts. The employer accounts have their own separate “5 year clock”. However once those contributions are rolled over into a Roth IRA, the 5 year clock used is the Roth IRA clock. So if you start making Roth contributions to an employer account for the first time in 2024 and eventually roll those funds to your Roth IRA, they will be eligible for tax free withdrawal based on that January 1, 2023 clock.
https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/
If you are going to make direct Roth contributions to your IRA you better be very confident you are going to be under the MAGI limits otherwise that SEP-IRA could really complicate any unexpected backdoor Roth steps you have to make. If possible, I would consider transferring your SEP-IRA to an employer provided tax protected account (401k, 403b, etc) or solo 401k. Or, just play it safe and use the backdoor process (the whole point of this post) .
One situation where it would be better to wait until the back half of the year to do a backdoor Roth is for those changing jobs or retiring and planning on rolling over a 401k into a traditional IRA. The 401k plans offered by small private practices typically have high administrative fees (mine is 1% on top of the standard expense ratio). Don’t want to get burned by the pro rata rule. You could in theory leave the 401k in place until the following year, but anyone who has a substantial 401k balance would likely pay more in fees during those few remaining months of the current tax year than any tax savings from one extra Roth IRA contribution.
That is a very reasonable consideration. If that scenario presented itself in real life I would suggest taking a couple online surveys and using that “business” income to open a solo 401k. I’d much rather see that old 401k money land in a solo 401k with low fees and investments I can control instead of a rollover IRA which will ruin my ability to make Backdoor Roth IRA contributions.
Depends on the level of fees in the 401(k). I haven’t ever had one that had fees that would outweigh the benefit of a Roth IRA even on a large account.
What fee level would you consider high?
My current 401k has a 1% admin fee on top of the usual expense ratio. So for a 500k account, every year I’d be paying an extra $5000, and likely more as years progress. Would an annual $7000 per person Roth IRA + keeping the high fee 401k still come out ahead vs putting that same 7k in a taxable account + ditching the 401k and avoiding the fees? I guess it’s also important how close to (early) retirement the person is, since contributing to an IRA is irrelevant once earned incomes ceases.
The solo 401k is a great idea; I’ll have to look into that.
Well, my employees don’t pay any fees at all in their 401(k) besides the expense ratios (which are all less than 10 basis points) so I think any fees are high. But certainly a 1% AUM fee is high. It’s still worth using but you don’t have to like it.
I will turn 50 in May 2024.
I would like to do the Backdoor Roth now in January 2024 like I usually do.
Can I contribute the $8000 amount that is now allowed for 50 year olds or do I have to wait until May to do that?
Thanks!
I would go ahead and contribute the $8000 now. In the remote chance that you die before your birthday, your estate can make the correction to the $7000 contribution.
Thanks….and I wouldn’t get in trouble for making this contribution and conversion 5 months earlier than my 50th birthday?
There is no limit on conversions. The limit is on contributions and you can make the higher contribution starting in the year in which you turn 50. Jan 2nd is fine even if your birthday is in June.
Thanks so much for confirming!!
No correction needed. The $8,000 contribution is allowed even if she passed this month as long as she made $8K first.
Awesome, thank you. I knew I was going to learn some good nuggets from writing and responding to this post.
I have a quick question and would really appreciate if anyone is able to help me out. My sister in law is a CPA, she helps me with my taxes every year, I’ve asked her and she isn’t sure. I’ve tried to do my due diligence on my own but can’t come up with what I need to know
2023 was the first year that I intended to begin doing an annual backdoor roth conversion from my rollover IRA (for the purposes of a conversion, rollover IRA will work in place of a traditional IRA, or at least I’ve read that). I transferred the $6500 from my savings into the rollover during the last week of 2023, and the transfer just now finalized (today, Wednesday Jan 3rd). So I can complete the transfer into the roth IRA now.
It’s 2024 now though of course, but also I know it’s still before April (tax month). So if I do it now, can I get it to count for 2023/would I have to back date it in order to count for 2023? Or if I convert now, will it count for 2024? Ideally I do it now and make it count for 2023, then do it again at the end of this year for my 2024 conversion. I’m wary of converting it now after reading this post about making the conversion in January.
If I can’t make it count for 2023, then I guess I should just leave the $6500 sitting all year in the rollover IRA in the fidelity money market fund, and convert it over to my roth in December (then figure out what to do with the left over pennies/spare dollars in the rollover, I know theres an article about that somehwere on here).
I hope this is making sense to somebody. Not so much of a “quick question” I guess after seeing this short novel that I’ve typed.
Thank you!
Tyler
No problem, you just need a little extra attention to detail on your 2023 and 2024 form 8606 to get this right (see link below for someone who did the same thing last year).
https://www.bogleheads.org/forum/viewtopic.php?t=394370
I would just make your $7000 traditional IRA contribution today for your 2024 contribution, then convert the entire amount to your Roth, and then make sure you get your form 8606 right on your 2023 and 2024 tax return.
The bigger lesson here is don’t mess around with backdoor Roths at the end of the calendar year. If it’s not all finished and tidied up by Thanksgiving, just wait and do it in January of the following year.
Thank you so much for the help.
Tyler I have one more quick question – For my 2023 backdoor conversion, I’ve made the traditional IRA contribution back in December ’23 and conversion in Jan ’24. So I made my 2023 contribution later in the tax year (less ideal than doing it at the beginning I’ve read).
Would now be an acceptable time to do a contribution + conversion for 2024? I’ve just completed my 2023 conversion, so should I wait to do the 2024 conversion until Jan ’25 or is it okay to do it now?
Yes. Go ahead and do your 2024 contribution and conversion now.
I hope you didn’t do a 2022 Backdoor Roth conversion step in 2023, or that’ll be pro-rated. Not the end of the world, but you just want to make sure that IRA is empty on 12/31 of any year you do a conversion in.
Thanks for responding, last year was the first year I’ve done this so I should be okay. Just wish I wouldn’t have done the contribution in Dec ’23 and conversion in Jan ’24 because its confusing me, my intent was for that to be the conversion for 2023 and for the new one I’m about to do for 2024, then going forward I will do it every January as suggested
Tyler
Quick inquiry,
I finished fellowship in June 2023, and made the above mentioned mistake of contributing 6K to a Roth IRA in March 2023, then recharacterized to a traditional IRA in April of 2023 and then did a delayed back door Roth IRA conversion (~$6300) in December of 2023. (My tax preparer did report my recharacterization on last years taxes)
I was going to contribute 7K to a traditional IRA this week (January 2024) and do the backdoor conversion the following day. Will this 2024 backdoor conversion conflict with the delayed back door Roth IRA conversion in late 2023? Does this cause any additional paper work outside from submitting an 8606 for the 2024 conversion?
Kind Regards
Thank you very much!
If your traditional IRA had $0 on December 31st, 2023 then there is no issue. I recommend looking at and thinking through form 8606 (it’s a pretty simple form) to understand the actual questions being asked on that form. Doing so often brings a lot of clarity to this process.
Feel free to proceed with your $7000 backdoor Roth at any time.
No. Go ahead.
No. The only paperwork for BD Roths is an 8606 for each year.
dominating article Tyler. U da man! seems like you’ve got this whole BDR thing covered. I did think of a another group of people that might want to do the BDR- what if you play the lotto? I think those winnings would be considered income, correct? or maybe you have a poker side gig like Matt Damon in Rounders- might want to BDR in case you win the World Series! But seems like anybody who might gamble and win a substantial windfall should BDR because, hey, you never know!
Seems like Joey Knish would know the answer to that.
Lol! Good call Rikki, I definitely didn’t think of that demographic. I bet those who can tolerate the gamble of putting it all on red can also tolerate the gamble of having to do a recharacterization!
Seriously though, I’d love to see the Venn diagram of people who make Roth IRA contributions and who routinely gamble. My first impression is that it is very low but with the proliferation of legalized sports betting that has exploded the past two years, I imagine it is a pretty sizable and growing demographic.
Is there any reason _not_ to do a Roth via the back door? Even if you make, say, 100k a year, why NOT do the back door? That way if your circumstances change you are covered.
A different 5 year rule applies, but it’s still a 5 year rule. So no, not really. I guess if there’s something that would be pro-rated that would be a reason too. But as a general rule, if it’s even possible you’ll have to do it through the Back Door, do it through the Back Door.
Hi – thanks for the article, this is very helpful!
I have a question on IRA conversion, and hope to get your expertise.
In December 2023, I recharacterized my 2023 contribution from Roth to Traditional IRA along with some gains. My intention was to then convert the full amount immediately after recharacterization. My bank delayed processing my request and the recharacterization ended up took place 12/27. Then immediately, I submitted my request for conversion hoping to completed by 12/31 but it didn’t happen.
On 01/04, I received letter from my bank that they can’t process my request, and that I have to submit my paperwork again due to a system issue. On the same day, I deposited my 2024 contribution to Traditional IRA ($7000).
My question is what’s the tax implication on my initial rechacterzation? In Jan, I am planning to convert $7000 (2024), should I also convert the 2023 amounts? What do I do with the 2023 gain? What’s the tax implication on the conversion?
Thank you so much!
You basically did your contribution in 2023 and your conversion in 2024. No big deal assuming you didn’t do any other Roth conversions in 2023. You’ll owe taxes on the gain on your 2024 tax return. I’d just convert it all and pay the tax bill. More info here:
https://www.whitecoatinvestor.com/ira-recharacterizations/
This can be, and has been, an entire blog post on its own so I am intentionally not going into the weeds on this one.
For our purposes,
Very timely! Getting married later this year and will have future spouse do a back door Roth rather than a direct. Thank you!
Married filling jointly, if household MAGI is above limits but one of the earner’s income alone is below the limit does the lower income earner still have to do a backdoor? Thanks
If you file your taxes jointly and the household MAGI is above the income limits then both spouses must use the backdoor.
If you file taxes separately you’ll definitely need to do the Backdoor.
Hi this info is super helpful thank you. I unfortunately think I made the mistake listed above and would love input.
1) I got married in May 2023 and then stupidly invested into my Roth IRA over the summer and then again in the fall to get up to the $6500 contribution limit. My husband separately invested into his Roth IRA too. Now we are looking at our combined income and it looks like it is going to be just above the $228,000 sadly. Tyler, based on your article, sounds like we can each move our $6500 into a Schwab rollover IRA and then transfer it back to the Roth the next day and fill out form 8606? You stated that we would have to pay taxes on whatever income we’ve made which for the last year appears to be a few hundred dollars. Is this a separate form to report and pay taxes on the income??
2) Next year, we are going to be filing our taxes married filing separately for student loan purposes. Can you still do the backdoor route? My understanding was you could not invest anything into a Roth IRA if you filed separately.
Thanks all!