Backdoor Roth

• A backdoor Roth IRA is not an official type of retirement account. Instead, it is an informal name for an, IRS-sanctioned method for high-income taxpayers to fund a Roth, even if their income is higher than the maximum the IRS allows for regular Roth contributions. The annual Roth IRA limit is $6,000 in both 2020 and 2019, up from $5,500 in 2018 (if you’re 50 or older, you can add $1,000 to those amounts).
• TY2019 Traditional IRA phaseout (MAGI):
• Single: 64,000 - 74,000
• Married: 103,000 - 123,000
• TY2019 Roth IRA phaseout (MAGI):
• Single: 122,000 - 137,000
• Married: $193,000 to $203,000
• Backdoor Roth IRAs are not a special type of account; rather, they are usually traditional IRA accounts or 401-K's which have been converted to Roth IRAs. A backdoor Roth IRA is a legal way to get around the income limits that normally restrict high-earners from contributing to Roths. A backdoor Roth IRA is not a tax dodge—in fact, you might incur a small amount of tax when it's established—but it does provide investors with future tax savings.
• Traditional IRAs don't have income limits. And since 2010, the IRS has not had income limits restricting who can convert a traditional IRA to Roth IRA. As a result, the backdoor Roth has become an option for higher-income taxpayers who ordinarily weren't able to contribute to a Roth.
• The funds you put into the Roth are considered converted funds, not contributions. This means you have to wait five years to have penalty-free access to your funds if you’re under age 59½. In this sense, they differ from regular Roth IRA contributions, which you can withdraw at any time without tax or penalty.
• You can do a backdoor Roth IRA in one of several ways:
• The first method is to contribute money to an existing traditional IRA and then roll over the funds to a Roth IRA account. Or, you can roll over existing traditional IRA money into a Roth—as much as you want at one time, even if it's more than the annual contribution amount.
• Second way is to convert your entire traditional IRA account to a Roth IRA account.
• Third way to make a backdoor Roth contribution is by making an after-tax contribution to a 401-K plan and then roll it over into a Roth IRA.
• Backdoor Roth is not a tax dodge. You still need to pay taxes on any money in your traditional IRA that hasn’t already been taxed.
• 10% Penalty and Roth IRA Conversions
• While funds you convert to a Roth IRA are taxable no matter your age, the 10% penalty doesn't apply to conversions. Be careful here. Withholding funds to pay tax on the conversion results in a 10% penalty to the amount withheld. (Any amount not converted is a regular distribution).
• For example, if you contribute $6,000 to a Traditional IRA and then convert that money to a Roth IRA, you’ll owe taxes on the $6,000, or whatever portion of your existing Traditional IRA basis ratio is to your rollover. IRS Form 8606 is used to help determine the taxable portion of a distribution or conversion and must be filed in the distribution year.) If you're non-deductible Traditional IRA contribution is immediately converted (rolled-over) into your Roth, (1099-R Box 7, Code "2" - Roth Exception),
• You’ll owe taxes on whatever money it earns between the time you contributed to the Traditional IRA and when you converted it to a Roth IRA. (1099-R Codes for Box 7. ... Use Code 2 only if the participant has not reached age 59 1/2 and you know the distribution is: A Roth IRA conversion (an IRA converted to a Roth IRA) or a distribution made from a qualified retirement plan, or IRA, because of an IRS levy under §6331.