Brief History

First let’s start with a brief history on the Roth IRAs and how paying taxes today might* avoid them at retirement time (distribution). The word might* in the previous sentence is because we never know if Roth IRA will be taxed in the future (i.e. Social Security benefits began to be taxed in 1984 under the Reagan administration).

  • The Roth IRAs were created in 1997 by the Taxpayer Relief Act and went into effect in 1998.
  • Since 2010, the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) eliminated the income cap, making Roth IRA conversions available to all investors.
  • For the period 2010 to 2017, the Roth conversion was allowed but the IRS did not bless it due to the step transaction doctrine as the individual steps in the transactions may be permitted, the net result (holistic approach) in total might be violating certain provisions of the Tax code. The tax professionals considered that this was a grey area in the law.
  • Nowadays (since 2018), tax professionals consider that there is clear guidance thanks to the 2017 Tax Cuts and Jobs Act Joint Explanatory State that allowed the conversion even if the adjusted gross income exceeded the limits.

How does it work

  1. You are over the Roth IRA income limits – no direct contribution is allowed so this is the workaround or “Backdoor”
  2. You should not have a traditional IRA – otherwise, the IRA aggregation rule will combine the value of all IRA accounts to determine the pro rata portion subject to taxes (If you have previous IRAS in might make sense to transfer them to your employer 401k plan, or similar before the Backdoor IRA conversion).
  3. You can make a non deductible contribution to a traditional IRA for $7,000 in 2025 (plus catch up of $1,000 if over 50 years old)
  4. Then convert the traditional IRA to a Roth IRA (do the conversion immediately to avoid generating earnings or keep the investment in an asset with no interest or appreciation)
  5. If you follow the steps appropriately, then, the conversion is not taxable

When you should consider the Backdoor Roth contribution as a no brainer:

  1. You are over the Roth IRA contribution limits
  2. You have maxed out the Traditional retirement contributions
  3. You have some additional savings that you want to keep for retirement – this way those funds and its growth will be tax free at retirement

Each situation is different so please seek professional advice if this might be a suitable strategy for you.